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Declining Forex Reserve in India

 

Forex Reserve in India: Relevance

  • GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

 

Forex Reserve in India: Context

  • According to the recently released RBI weekly data, The nation’s forex reserves posted a decline of $678 million during the week ended January 21.

 

Declining Forex Reserve in India: Key points

  • The nation’s forex reserves has reached $634.287 billion against a lifetime high of $642.453 billion in the week ended September 3, 2021.
  • Reason: One of the reasons of the decrease is the drop in the foreign currency assets (FCA), which forms a vital component of the overall reserves.
    • FCA declined by $1.155 billion to $569.582 billion in the reporting week.
  • FCA include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
  • Interestingly, gold reserves saw an increase of $567 million to $40.337 billion during the same period.
  • The Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) fell $68 million to $19.152 billion.

 

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Impact of foreign reserve

  • Decrease in forex reserves may cause issues for the government and the RBI in managing the nation’s external and internal financial issues.
  • Higher forex provides a big cushion in the event of any crisis on the economic front as it provides cover to the import bill of the country for a year.

 

Foreign reserve importance

  • Higher reserves help the rupee strengthen against the dollar.
  • A rise in reserves provides a level of confidence to markets that a country can meet its external obligations.
  • The rise in forex also demonstrates the backing of domestic currency by external assets.
  • It assists the government in meeting its foreign exchange needs and external debt obligations, and maintain a reserve for national disasters or emergencies.

 

About SDR IMF

  • The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
  • To date, a total of SDR 660.7 billion (equivalent to about US$943 billion) have been allocated. This includes the largest-ever allocation of about SDR 456 billion approved on August 2, 2021 (effective on August 23, 2021).
  • The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
  • The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.

 

SDR India

  • SDR holdings is one of the components of the FER of a country.
  • IMF has made an allocation of SDR 12.57 billion (equivalent to around USD 17.86 billion) to India in 2021.
  • The total SDR holdings of India now stands at SDR 13.66 billion (equivalent to around USD 19.41 billion).

 

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