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India’s Foreign Exchange reserves

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India’s Foreign Exchange reserves recently crossed US$400 billion for the first time in its history in November 2017. Forex reserves is money or other assets held by a central bank of respective country or other monetary authority so that it can pay if need be its liabilities, such as the currency issued by the central bank, as well as the various bank reserves deposited with the central bank by the government and other financial institutions. Reserves are held in one or more reserve currency, mostly the United States dollar and to a lesser extent the EU’s euro, the British pound sterling, and the Japanese yen. Foreign exchange reserves play a crucial role in the component of balance of payments and also an essential element in the analysis of an economy’s external position. The level of India’s foreign exchange reserves consists foreign currency assets (FCA), gold, SDRs and reserve tranche position (RTP) in the IMF.

Countries use their foreign exchange reserves to keep the value of their currencies at a proper rate at the time of extreme market volatility and also the main function is to maintain liquidity in case of an economic crisis. For example, a flood or volcano might temporarily suspend local exporters’ ability to produce goods. That cuts off their supply of foreign currency to pay for imports. In that case, the central bank can exchange its foreign currency for their local currency, allowing them to pay for and receive the imports. The central bank supplies foreign currency to keep markets steady. It also buys the local currency to support its value and prevent inflation.

Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves in India. Reserve Bank of India accumulates/disperse foreign currency reserves by purchasing/selling from authorized dealers in open market operations whenever required. Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates starts rising.

In India RBI releases reserves information every Friday. India’s Foreign exchange reserves peaked at US$ 411 as on 5th January 2018 as per data released by Reserve bank of India as on 12th Jan 2018 of which US$ 387 billion (94.16%) in the form of foreign currency assets, US$ 20.5 billion (5%) in gold, US$ 1.5 billion (0.36%) in SDR’s and US$ 2 billion (0.48%)in reserve tranche position (RTP) in the IMF. Gold as a proportion of our reserves is relatively small with just 5% still it stood at second position. After foreign currency assets in our reserves. Gold is the ultimate currency in India. In fact, only gold came to our rescue during 1991 crisis.

The increase in Forex reserves in India from last few years demonstrates the underlying strength of its balance of payments with increase in FDI, FII and NRI investments, particularly from 2014.

Reserves are always needed to make sure a country will meet its external obligations. These include international payment obligations, including sovereign and commercial debts. If we observe imports in India during the Nov 2017 are stood at US$ 40 billion, so with the current level of reserves it can cover 10 months of imports easily.

In world more than 100 countries maintaining Forex reserves and provides data to IMF on weekly (or) monthly (or) quarterly (or) yearly basis depends on the country. China is in top position with US$ 3.1 trillion as on 31st March 2017 and then Japan and Switzerland in 2nd and 3rd place with reserves US$ 1.23 trillion and US$ 730.4 billion. India stood at 10th position in maintaining Forex reserves with US$ 369.95 billion as on 31st March 2017. As per figure.1 there are 24 nations in the world which are maintaining more than US$ 100 billion.

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