Daily News Analysis

Forex reserves

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Context: Recently, Forex reserves jumped $2.816 billion to $606.859 billion.

About forex reserves

  • Foreign Exchange Reserves refer to assets kept in reserve by a central bank, comprising foreign currencies such as bonds, treasury bills, and government securities.
  • These reserves, expressed in the US dollar, the international standard, are managed by the RBI, serving as the custodian of India's Foreign Exchange Reserves.
  • It includes:
    • Foreign Currency Assets (FCA)
    • Gold reserves,
    • Special Drawing Rights (SDRs)
    • Reserve position with the International Monetary Fund (IMF)

Significance

  • They are utilized to support liabilities denominated in their own issued currency, maintain the exchange rate, and formulate monetary policy.
  • They act as a safeguard in case of an economic Balance of Payment (BoP) crisis. The purpose is to ensure that the RBI has reserve funds in case the national currency experiences a rapid devaluation or faces insolvency.
  • If the Rupee depreciates due to increased demand for foreign currency, the RBI intervenes by selling dollars in the Indian money market to curb the depreciation.
  • Reserves instill confidence in markets and investors regarding a country's ability to meet external obligations.
  • A robust forex reserve is instrumental in attracting foreign trade and building a positive reputation with trading partners.

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