Context:
India becomes 4th nation to cross 700 billion dollars in foreign reserves, following China, Japan, and Switzerland.
Forex Reserves:
- Definition – Assets held by a central bank in foreign currencies, gold, SDRs, and RTP.
- Custodian in India – Reserve Bank of India (RBI) as per the RBI Act of 1934.
- Components of Forex Reserves (in descending order of value) –
- Foreign Currency Assets (FCA) – Valued in foreign currencies.
- Gold Reserves – Physical gold held by the RBI.
- Special Drawing Rights (SDRs) – Reserve asset from the IMF, valued based on a basket of 5 major currencies
- US dollar
- Euro
- Chinese Renminbi
- Japanese yen
- British pound sterling
- Reserve Tranche Position (RTP) – The difference between a member’s IMF quota and the IMF’s holdings of that member’s currency.
88.3% of the total foreign exchange reserves as of Mar’24 were held in foreign currencies and 8.1% in gold. Only 3.5% of reserves were held in SDR and RTP.
- Key Factors Influencing Forex Reserves –
- Foreign Direct Investment (FDI) – Investments from foreign entities into domestic businesses.
- Foreign Portfolio Investment (FPI) – Investments in financial assets like stocks and bonds by foreign investors.
- Remittances – Money sent back home by Indians working abroad.
- Need for Forex Reserves –
- Maintains foreign currency liquidity to absorb economic shocks during crises.
- Provides the necessary funds to meet international financial commitments.
- Assures credit rating agencies and investors that external obligations can always be met.
Source: Hindustan Times
Previous Year Question
With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of:
[UPSC Civil Services Exam – 2024 Prelims]
(a) Bond market
(b) Forex market
(c) Money market
(d) Stock market
Answer: (c)
