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Forex Reserves hit a record high

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Components of forex reserves

Mains level : Not Much

India’s foreign exchange reserves touched a lifetime high of $555.12 billion, according to RBI data.

Aspirants must make a note here:

  1. Authority managing FOREX in India
  2. Components of FOREX
  3. IMF’s SDRs
  4. Emergency use of FOREX

What are Forex Reserves?

  • Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
  • RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.
  • The Forex reserves of India consist of below four categories:
  1. Foreign Currency Assets
  2. Gold
  3. Special Drawing Rights (SDRs)
  4. Reserve Tranche Position
  • The IMF says official Forex reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.
  • It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

Where are India’s forex reserves kept?

  • The RBI Act, 1934 provides the overarching legal framework for the deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers and counterparties.
  • As much as 64 per cent of the foreign currency reserves is held in the securities like Treasury bills of foreign countries, mainly the US.
  • 28 per cent is deposited in foreign central banks and 7.4 per cent is also deposited in commercial banks abroad.
  • In value terms, the share of gold in the total foreign exchange reserves increased from about 6.14 per cent as at end-September 2019 to about 6.40 per cent as at end-March 2020.

Try this PYQ:

Q. Gold tranche(Reserve tranche) refers to (CSP 2020)-

(a) A loan system of World bank

(b) One of the operations of a central bank

(c) A credit system of WTO granted to its members

(d) A credit system granted by IMF to its members

Rising above the 1991 crisis

  • Unlike in 1991, when India had to pledge its gold reserves to stave off a major financial crisis, the country can now depend on its soaring Forex reserves to tackle any crisis on the economic front.
  • The level of Forex reserves has steadily increased by 8,400 per cent from $5.8 billion as of March 1991 to the current level.
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