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Tags Current Affairs

Forex reserves at all time high

Date: 07 September 2020 Tags: World Economy

Issue

India’s foreign exchange (forex) reserves surged by $3.883 billion to touch a lifetime high of $541.431 billion in the week ended August 28.

 

Background

 India’s forex reserves had crossed $500 billion for the first time ever in the week ended June 5, 2020, hitting what was then the all-time high of $501.7 billion.

 

Details

  • The current situation stands in stark contrast to the one in 1991, when India had to pledge its gold reserves to stave off a major financial crisis.

  • In March 1991, India had forex reserves of a mere $5.8 billion. The country can depend on its soaring foreign exchange reserves to tackle any crisis on the economic front.

  • The major reason for the rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs).

  • The fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange. Similarly, overseas remittances and foreign travels have fallen steeply.

  • The rising forex reserves give comfort to the government and the RBI in managing India’s external and internal financial issues at a time of major contraction in economic growth.

  • It serves as a cushion in the event of a crisis on the economic front, and is enough to cover the import bill of the country for a year.

  • The RBI uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens.

  • When the RBI mops up dollars, it releases an equal amount in rupees. This excess liquidity is sterilised through the issue of bonds and securities and LAF operations.

 

Forex reserves

  • Forex reserves are external assets in the form of gold, SDRs (special drawing rights of the IMF), and foreign currency assets (capital inflows to the capital markets, FDI, and external commercial borrowings) accumulated by India and controlled by the RBI.

  • Official foreign exchange reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.

  • It also limits external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

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