- 17 Aug 2019
- 3 min read
According to the latest Reserve Bank of India (RBI) data,India's foreign exchange reserves surged by $1.620 billion to $430.572 billion due to rise in foreign currency assets.
- The total foreign currencies (of different countries) an economy possesses at a point of time is its ‘foreign currency assets/reserves’.
- The Forex Reserves (‘foreign exchange reserves’) of an economy is its ‘foreign currency assets’ added with its gold reserves, SDRs (Special Drawing Rights) and Reserve Tranche in the IMF.
- Reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes.
Special Drawing Rights
- The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves
- The SDR is neither a currency nor a claim on the IMF.
- Initially SDR was defined as equivalent to 0.888671 grams of fine gold, which at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.
- This basket Includes five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
- The collapse of Bretton Woods system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset.
- Officially, the RBI targets neither a particular exchange rate nor foreign exchange reserves, but maintains forex reserves to reduce volatility in the forex market.
- Forex reserves act as an insurance when the rupee tends to be volatile against the dollar,
- In the process of supporting weakening rupee, RBI needs to buy dollars, ultimately, leading to higher forex buildups..
- But when RBI purchases dollars, it leads to infusion of rupee into the system which leaves inflationary effect on the economy.
- Citing the example of China, the Economic Survey 2014–15 held that India could target foreign exchange reserves of US$750 billion to $1 trillion.
- China has highest forex reserves in the world i.e., $3.2 trillion. India is currently the sixth largest holder of forex reserves