What Is Meant By Indian Forex Reserve?
Forex reserves include all those external assets that are owned and controlled by the Reserve Bank of India. External assets include Gold, Foreign Currency, and SDRs (Special Drawing Rights of the IMF). According to the International Monetary Fund (IMF) Forex reserves play a vital role in meeting various financial objectives, such as maintaining confidence in the economic policies of a country and effective management of exchange rate.
The Reserve Bank of India utilizes forex reserves to rescue national currency through market intervention. Forex reserves also help in maintaining liquidity and dealing with surprising blows of economic crises.
Forex Reserves and RBI
The RBI acts as a custodian of the forex reserves. The central bank manages forex reserves in line with the predefined policy framework of Indian government. It is a responsibility of RBI to allocate Dollars purposefully as and when required.
For example; The RBI allows individuals an annual remittance of up to 250,000 U.S. Dollars under the Liberalised Remittances Scheme (LRS) – read more for RBI guideline for foreign exchange transactions. Similarly, the RBI also intervenes to manage the rupee movement within the country. It buys U.S. Dollars when the Indian rupee begins to strengthen more than the required limit and sells U.S. Dollars whenever the rupee starts diminishing.
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How Much Is India’s Forex Reserves?
After India announced lockdown in March 2020, the Indian forex reserves surged by 31.8 Billion U.S. Dollars, marking a record accumulation of 501 Billion U.S. Dollars forex reserves.
Increased from 6.14 percent to 6.40 percent by the end of March 2020. The country’s forex reserves have grown significantly over the past 30 years. As of Feb 2021, the India Forex reserve stands at USD 583.697 billion.
It’s been quite a long since the RBI purchased dollars to increase its forex reserves. When the RBI accumulates a sufficient amount of dollars, it releases Indian rupees in an equal amount.
Not to mention, the RBI manages the excess liquidity via the issuance of bonds, investment in securities, and liquidity adjustment facility (LAF). Lately, economists believed that the RBI doesn’t seem to step off from accumulating forex reserves despite the on-going deterioration of dollars in the international market.
The Indian GDP seems to be contracting for the first time since 1980. Also, the fragile trading activity indicates an unclear economic situation. However, India still cheers on its ability to tackle financial challenges amid the Covid-19 pandemic.
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How Does India Hold Its Forex Reserves?
Forex reserves of India are held in multiple foreign currencies and Gold. The RBI provides the legal framework for storing the country’s forex reserves. According to the RBI stats, nearly 64 percent of Indian forex reserves are in the form of securities. On the other hand, around 28 percent are kept with overseas central banks. The rest of the forex reserves are deposited with commercial banks outside India. India keeps 360 tons of Gold, with the Bank of England (BoE) and the Bank for International Settlements. The rest of the Gold reserves are stored domestically.
Why are Indian forex reserves increasing?
One of the main reasons for soaring forex reserves of India is the rise of foreign direct investment in the stock market of India. It is observed that the share of foreign stakeholders has significantly increased over the last twelve months.
After India pulled 600 billion from debt and equity segments of its capital infrastructure in March, foreign portfolio investors started purchasing stocks in the Indian Stock Market worth 2.75 Billion U.S. Dollars at the beginning of June 2020. In addition, the forex inflows also increased significantly, crossing the 500 Billion U.S. Dollar milestone. Only Jio Platforms – the subsidiary of Reliance Industry – observed an inflow of foreign investment totaling 970 Billion in 2020.
On the other hand, the decreasing import prices of crude oil in the international market have significantly reduced the outflow of foreign reserves. Also, limited foreign travels amid Covid-19 and lower volume of international remittances played their part in saving 61 percent of the forex reserves outflow. It is worth mentioning here that the forex reserves also witnessed a boom after finance minister Nirmala Sitharaman announced the reduction in corporate taxes in September 2020. The decision was taken amid the growth of foreign reserves by $73 billion over the last three quarters.
Significance of Rising Forex Reserves
Increasing forex reserves provide immense confidence to the Central Government of India as well as RBI to deal with financial crises efficiently. It is not less than a blessing for a developing country like India, that its forex reserve stands strong to tackle the anticipated diminishing economic growth in 2020-21. Sufficient forex reserves available to meet import bills for a whole year in times when the rest of the world is on the blink of a financial blow is enough to offer India a sigh of relief.
The rising forex reserves have strengthened the Indian Rupee against the US Dollar in the international market. The foreign reserves of India make 15 percent of the country’s GDP. Forex reserves also ensure external stakeholders and creditors that the country is capable of meeting its external obligations. In addition to demonstrating the backing of the local currency, external assets also become handy to fulfill the immediate need of national disasters and emergencies.