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Current Affairs

RBI panel to assess adequacy of Forex reserves

Date: 10 September 2019 Tags: Monetary Policy & RBI

Issue

The Reserve Bank of India (RBI) is working on putting in place a formal mechanism to assess the adequacy of its foreign exchange, or forex, reserves. This is important as India’s external liabilities have been higher than its forex reserves in recent years.

 

Background

The Bimal Jalan Committee on Economic Capital Framework, had noted that the RBI’s forex reserves in 2008 were higher than country’s external debt, a position which has reversed in 2019.

 

Details

  • At present, India’s  foreign exchange reserves (more than $400 billion) are significantly lower than the country’s total external liabilities ($1 trillion) and even lower than total external debt ($500 billion).

  • This position is opposite to that in 2008 when India’s foreign exchange reserves, at $310 billion, exceeded the then total external debt of about US$224 billion and provided a much larger coverage of total external liabilities that amounted to about $426 billion.

  • RBI may be required to increase the size of its forex reserves with its concomitant implications for the balance sheet, risks and desired economic capital.

  • The Centre is expected to raise around $10 billion from overseas markets through foreign currency bonds, on which it will have to bear currency risk. This also make up significant part of liability.

Forex Reserves

  • Foreign exchange reserves are cash and other reserve assets held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.

Foreign currency assets, gold, special drawing rights and reserve tranche position in the International Monetary Fund are the main components of India’s forex reserves.