India’s forex reserve has crossed $600 billion mark for the very first time in the country’s history. As per the weekly RBI data, last week India’s foreign exchange reserve surged up to a record USD 605.008 billion driven by a rise in foreign currency assets (FCA), a major component of the overall reserves.
What is Foreign Exchange Reserve
Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold 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.
Who Maintains India’s Forex Reserves
The foreign exchange reserves are managed by the Reserve Bank of India(RBI), also known as the central bank of India.
Reserve Bank of India(RBI) is the Central Bank and regulatory body under the jurisdiction of Ministry of Finance, Government of India. It was setup in the year 1935 in accordance with the Reserve Bank of India Act, 1934. RBI is responsible for the regulation of Indian Banking System and framing monetary policies.
India’s Forex Reserve hit $600 billion mark
The huge influx of dollar during pandemic period gives a substantial strength to the country imports. As per RBI Governor Shaktikanta Das, current India’s foreign reserve covers an import upto 16 months. In the previous month of May, the reserves had swelled by USD 5.271 billion to USD 598.165 billion. In the reporting week, FCA jumped by USD 7.362 billion to USD 560.890 billion.
Key Factors behind this Increase
- By maintaining sustainable exchange rate.
- Rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs).
- Fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange.
- Similarly fall in the demand of petroleum products saved a lot of assets from foreign exchange.
- The drop in import of electronic goods from China also played a significant role.
- Reduction in import is also aligned with the Government of India initiative Aatmanirbar Bharat Abhiyan(Self-reliant India Initiative).
- Gold Import has been substantially reduced due to low demand in pandemic period, which again helped saving foreign exchange reserves.
Comparing with Other Countries
India has now the 5th largest pool of foreign reserves after China, Japan, Switzerland and Russia. It is now less than $200 million behind Russia.
Where does RBI Keep India’s Forex Reserves
The RBI deploys the reserve in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers and counterparties. As per the RBI data, around 64% of the foreign currency reserves are held in securities like Treasury bills of foreign countries, mainly the US, 28% is deposited in foreign central banks and 7.4% is also deposited in commercial banks abroad. More on RBI Foreign Exchange Data.
What is the Return in maintaining Forex Reserves
Currently the return in maintaining foreign reserves is less than 1% or almost negligible due to low US Interest rates. Some of the experts and analysts suggested in past few years to divulge the unemployed reserves to the Infrastructure development but RBI strongly opposes the idea. Several analysts argue for giving greater weightage to return on forex assets than on liquidity thus reducing net costs if any, of holding reserves. More on Indian Express article.
How Rising Forex Reserves helps the Country
- The idea of Forex Reserve is that it should work as a buffer when there is a requirement.
- The rising reserves helped the rupee to strengthen against the dollar.
- Reserves will provide a level of confidence to markets that a country can meet its external obligations.
- It also helps during National Disasters and Emergency.
- Forex Reserve helps government meet its external debt obligations.
Drawback of Huge Foreign Exchange Reserves
The fast accumulation of reserves has made India be clubbed with other nations in the ‘currency manipulator’ watchlist of the US government. Other countries on this list are China, Japan, South Korea, Germany, Ireland, Italy, Malaysia, Singapore, Thailand and Mexico as of now.