It is the asset which RBI hold. In most cases, those reserves are kept in the currency of advanced countries like US Dollar, Euro, Japanese Yen, or Pound Sterling. It is used to underpin the liability-and-reserve-system created by other financial institutions or government which banks have deposited with them in safekeeping.
- Allows for backing and lessening of confidence regarding monetary and exchange rate management policies.
- Provide capability for intervention in support of the national or union currency.
- Limit external vulnerability through provision of liquidity in foreign currency so as to enable it absorb shocks in crisis situations or when access to external borrowing becomes limited.
Purposes of Keeping Forex Reserves
- Keeps their currency firmly pegged.
- Retain liquidity in case of sudden economic crisis.
- Meet the nation’s foreign obligations and liabilities.
Why High Forex Reserves?
- High investments from the foreign portfolio investors along with enhanced FDIs.
- The dip in the crude oil prices has reduced the bill of oil imports, thus saving foreign exchange.
Significance of Forex Reserves
- Well-defined foreign reserves cushion better the developing market central banks against sharp declines of their respective currencies.
- Increasing Forex Reserves may actually attract the comfort of government regarding both the external and internal dn financial issues of India.
Components of Forex Reserves:
Assets in Foreign Currencies: A significant part of the reserves raised foreign currency assets by $2.061 billion, up to $568.852 billion. These assets reflect the impacts of the appreciation or depreciation of all currencies except the US.
Gold Reserves: Gold reserves fell by $595 million and now stand at $66.979 billion.
Special Drawing Rights: SDR’s rose by $22 million, now at $18.007 billion.
Reserve Position with IMF: The reserve position of India with International Monetary Fund increased by $22 million to stand at $4.254 billion.
