From UPSC perspective, the following things are important :
Prelims level : India's Forex reserves, SDR, Reserve tranche
Mains level : Forex Reserves and its significance
India’s foreign exchange reserves rose by $943 million to touch a lifetime high of $462.16 billion according to the latest data from the RBI.
Forex reserves of India
- They are holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than Indian rupee.
- The reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets.
- They act as the first line of defense for India in case of economic slowdown, but acquisition of reserves has its own costs.
- They facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
- They act as a cushion against rupee volatility once global interest rates start rising.
Composition of Forex
- 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:
- Foreign Currency Assets
- Special Drawing Rights (SDRs)
- Reserve Tranche Position
What is Reserve tranche?
- Reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes.
What are Special Drawing Rights?
- The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves
- The SDR is neither a currency nor a claim on the IMF.
- Initially SDR was defined as equivalent to 0.888671 grams of fine gold, which at the time, was also equivalent to one U.S. dollar.
- After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.
- This basket Includes five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.