A Quick Note on Indian Forex Reserves

Foreign exchange reserves, or forex reserves, are assets such as foreign currencies, treasury bills, gold reserves, etc. India has vast foreign-exchange reserves or forex reserves- which are holdings of cash,  bonds, bank deposits and many other financial assets monopolised in currencies other than India’s national currency, known as the Indian rupees. The main component of forex reserves is foreign currency assets. 

In India, it is generally held in the reserve currency, mainly the US Dollar and, to a lesser level, the Euro, Japanese Yen, and Pound Sterling. This reserve is used to back its liabilities like the native currency issued and also reserves deposited by financial institutions or the government with the central bank.

These foreign exchange reserves or forex reserves of India are handled and managed by the Reserve Bank Of India (RBI) on behalf of the Indian government. Foreign-exchange reserves, or Forex reserves of India, work as the first line of defence for India in case of an economic slowdown, but the acquisition of reserves has its own costs. Foreign exchange reserves facilitate external trade and payment and promote orderly development and maintenance of the foreign exchange market in India.

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Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the forex reserves. Reserve Bank of India accumulates foreign currency reserves by purchasing from authorised dealers in open market operations. The forex reserves of India act as a protector against rupee volatility once global interest rates start rising.

The Foreign Exchange Reserves of India consist of four categories.

Foreign Currency Assets – Foreign Currency Assets (FCA) are the most significant body of India’s foreign exchange reserve, or India’s Forex Reserve are the assets like US Treasury Bills bought by the RBI using foreign currencies. The FCA is the largest component of the forex reserve. Total FCA till March 2021 was $536.69 billion, out of which $359.87 billion is invested in overseas securities, $153.39 billion is deposited with other central banks, and $23.42 (4.36 per cent of total FCA) billion is deposited with overseas commercial banks.

 Gold – As of March 2021, RBI held 695.31 metric tonnes of gold. 403.01 metric tonnes are in the custody of the Bank of England, and the Bank for International Settlements 292.30 tonnes of gold is held domestically.

Special Drawing Rights (SDRs)- The SDR is an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. To date, a total of SDR 660.7 billion (equivalent to about US $943 billion) have been allocated. This includes the largest-ever allocation of about SDR 456 billion approved on August 2, 2021 (effective on August 23, 2021). This most recent allocation was to address the long-term global need for reserves and help countries cope with the impact of the COVID-19 pandemic. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling, held domestically.

 Reserve Tranche Position – This is the percentage amount of SDR, as above mentioned about SDR. So, the SDR amount cannot be used by the RBI without the permission of the IMF. It’s just the amount reserved for quota. But, there is one option to use the SDR amount, but only to a certain percentage of SDR. And it is called the Reserve tranche. For Example: let’s say SDR consists of $200 million. So, the 25% amount kept as a reserve tranche will be $50million. This amount can be used by RBI for buying and selling foreign currency or Indian currency. But, the remaining $150million is of SDR, which is mandated by the International Monetary Fund, not to use as the transaction amount.

Important Point 

 Indian Forex Reserve Position in 2022: India’s foreign exchange reserves, or forex reserve, fell by $9.646 billion in the week ending March 11, 2022. This drop in forex reserves was attained on March 7 when state-run financial institutions sold dollars (USD) on behalf of the Reserve Bank of India (RBI) to prevent the Rupee from breaching the 77 per USD mark as raw oil prices surged beyond $120 per barrel, foreign portfolio investors exited equity markets, and international monetary markets experienced volatility due to the Russia-Ukraine conflict.

 The Rupee (INR) reached a low of 76.96 per USD on March 7th during the reporting week. The Indian rupee, on the other hand, ended the week at 76.59 per dollar on March 11. As of March 11, 2022, the currency reserves were $622.275 billion. This could be the first time the Foreign exchange reserves have dropped sharply in a week.

The decline in reserves was mostly due to a $11.108 billion loss in foreign currency assets (FCA) during the reporting week.

 Foreign currency assets (FCAs) dropped by $3.202 billion during the reporting week.

FCAs are multi-currency assets held in multi-asset portfolios (such as securities, deposits with foreign central banks and the BIS, and deposits with commercial banks in other countries). Gold, which was up $1.230 billion during the reporting week, was the only factor in the currency reserves that increased.

The reserves’ other two components, Special Drawing Rights ($53 million) and Reserve Position in the IMF ($7 million), both decreased.

 In a recent address, Reserve Bank of India Deputy Governor MD Patra said: “Perhaps the tremendous strength of India’s external sector is that the buffer provided by the holdings of forex reserves. The status of reserves has surged from 16 per cent of GDP at the end of March 2013 to the recent level of 20.5 per cent.

 “The import cover provided by the reserves on a prospective basis has doubled whereas short-run external debt on a residual maturity basis has declined over the similar amount from 59.0 per cent of reserves to 40.3  per cent,” Patra highlighted that it’s comforting that India presently has the fifth-largest holdings of international reserves within the world. 

“In fact, India’s worldwide assets cover three-fourths of India’s external liabilities, as well as debt, equity, and every other aspect of contractual obligations. Furthermore, there are second lines of defence in the form of forward assets and swap lines,” he said.

Forex reserves stood at $617.648 billion as of March 25, 2022.

Forex reserves had declined by $2.597 billion in the week ended March 18, 2022, and by $9.646 billion in the week ended March 11, 2022.

The country’s foreign exchange reserves declined by $2.030 billion in the week ended March 25, 2022, primarily due to a fall in foreign currency assets.

Forex reserves stood at $617.648 billion as of March 25, 2022.

Conclusion

The government is considered to be in a good position if there are rising forex reserves and the Reserve Bank of India handles India’s external and internal economic problems at a time of major contraction (23.9%) in economic improvement. It Assists the government. In meeting its forex requirements and external debt obligations. The rising forex reserves have helped the rupee to strengthen against the U.S. dollar. The rising Forex Reserve performs as a cushion in the event of a balance of financial crisis on the economic front. It’s enough to coat the import bill of the country for a year. Confidence within the Market: Forex Reserves would present a level of confidence to markets and investors that a nation could meet its external obligations