India's Forex Reserves

Published: 23rd Mar, 2024

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
Foreign Currency	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.
Gold	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.
Special Drawing Rights (SDRs)	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
Reserve portion in the IMF	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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