India's Forex Reserves
- Category
Economy
- Published
23rd Mar, 2024
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Context
India's foreign exchange reserves jumped by USD 10.47 billion to USD 636.1 billion, as per the latest data by the Reserve Bank of India (RBI).
1: Dimension- Impact of Indian Forex Reserve on the Economy
Positive Impact
- Stabilisation of Currency: The Indian forex reserves help stabilise the native currency by allowing the government to intervene in the foreign exchange market.
- Enhanced Creditworthiness: Having substantial reserves improves India's credit rating, attracting foreign investments.
Negative Impact
- Opportunity Cost: Holding large reserves means funds are not invested elsewhere, leading to potential opportunity costs.
- Inflationary Pressures: Excessive resources can lead to inflationary pressures within the economy.
2: Dimension- Reason for surge
- Over the years, India's forex reserves have been driven by various factors, including a surge in foreign direct investments, growth in IT and service exports, and prudent economic policies.
- The Indian government and Reserve Bank of India utilise reserves to manage exchange rates and monetary policies effectively.
Components of Forex Reserve
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Foreign Currency
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- Major Currencies Held: USD, EUR, GBP
- Purpose: Facilitate international trade, provide liquidity
- Impact on Indian Forex Reserves: Maintains the value of the local currency and ensuring that the country can meet its foreign obligations.
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Gold
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Gold is a hedge against inflation and provides a safety net during economic uncertainties.
- Purpose: Hedge against inflation and safety during economic downturns
- Impact on Indian Forex Reserves: An extra layer of protection and value, reflecting the traditional importance of gold in the Indian economy.
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Special Drawing Rights (SDRs)
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They are international reserve assets the IMF has created. They supplement the foreign exchange reserves of the member countries.
- Purpose: Supplement foreign exchange reserves
- Impact on Indian Forex Reserves: Enhances international liquidity
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Reserve portion in the IMF
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The reserve portion in the IMF represents India's quota in the International Monetary Fund. It reflects India's position and voting power within this global financial institution.
- Purpose: Reflects India's position in the IMF
- Impact on Indian Forex Reserves: Strengthens international standing
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