FOREIGN EXCHANGE RESERVES

 

FOREIGN EXCHANGE RESERVES

        Foreign Exchange Reserves are the external assets in the form of Foreign currency assets(capital inflows to the capital market,FDI and external commercial borrowings), gold and SDR(Special Drawing Rights of the IMF) accumulated by India and controlled by the RBI.

Objectives(Why  countries hold foreign exchange reserves):

       It held in supporting of a range of objectives like supporting and maintaining confidence in the monetary policy, exchange rate management and maintain confidence in the financial markets.

      It held for external transaction, speculative and precautionary purpose.

      It will help in managing India's external and international financial issues. 

      It is a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year. 

      It help to the rising reserves have also helped the rupee to strengthen against roller.

      Reserves will provide a level of confidence to market that a country can meet it’s external obligation needs and external debt obligations maintain reserve for national disasters or emergencies.

      Limiting external vulnerability by maintaining directed currency liquidity to absorb shocks during times of crisis including national disasters or emergencies.

     RBI functions as the custodian and manager of foreign exchange reserves and operates within the overall policy framework agreed upon with GOI.

    RBI sells the dollar when rupee weakens and buys the dollar when the rupee strengthen.

SDR(Special Drawing Rights):

     The SDR is neither a currency nor a claim on the IMF. Rather , it is a potential claim on the freely usable currencies of the IMF members. SDR can be exchanged for their currencies.

     The currency value of the SDR is determined by summing the value in U.S. rollers, based on market exchange rates, of a basket of major currencies(the U.S dollar, Euro, Japanese yen, pound sterling and the Chinese yuan/ renminbi). The SDR currency value is calculated daily. The valuation basket is adjusted for every five years.

SDR basket:

Currency    Weights                   Fixed number 

                     determined in the    of units of 

                     2015 Review              currency

U.S. Dollar 41.73 0.58252

 Euro 30.93 0.38671

 Chinese Yuan. 10.92                 1.0174

 Japanese Yen. 8.33      11.900

 Pound Sterling.  8.09 0.085946

      

      The SDR basket of currencies includes the US dollar, Euro, Japanese yen, Pound sterling and Chinese Yuan/ renminbi.

     Quota (the amount contributed to the IMF) of a country is denominated in SDR.

      Members voting power is related directly to their quotas. 

Now, India is the world's 5th largest foreign exchange reserve holder.

World top 5 foreign exchange holders are as following:

Countries           Millions          Figures as of

                            of US dollar 

1)China              3298220           July 2020

2)Japan              1402475           July 2020

3) Switzerland 896111             June 2020

4)Russia            590200             14 August 2020

5)India              535252             14 August 2020

India's present position of foreign exchange reserves:

Item.                 As on August 14, 2020

                          In Rupees           In US$                                                  Millions

Total Reserves  4009058            535252

a)Foreign           3681783           491550  

Currency Assets    

b)Gold                281589             37595

c)SDRs               11082                1479

d)Reserve         34605                4628

 position in the IMF   

       At a time when the economy is under stress and the growth is expected to contract in 2020-21, the rising forex reserves have come as a breather as it can cover India’s import bill of more than one year.

     This recent surge in foreign exchange reserves due to the improvement in the trade deficit, rise in investment in foreign portfolio investors in Indian stocks and FDI. On other hand, the fall in crude  prices has brought down the oil import bill, saving precious foreign exchange reserves. Overseas remittances and foreign travels have fallen steeply.

    *In 1991, India was in economic crisis India's foreign exchange reserves record low stood at $1.2 billion in January and depleted by half by June, barely enough ti last for roughly 3 weeks of essential imports.

    *The present position of following countries to cover for imports in months(Ref. Dainik Bhaskar date on 25th August):

1)Saudi Arabia-38.8 months

2) Switzerland-38.2 months

3)Brazil-24.6 months

4)Japan-23.3 months

5)Rassia-22.1 months

6)China-18.8 months

7)India-16.5 months

Reference: Data from World bank, IMF and RBI.

By...

S.M.Rachawad 

At Post Palak. Tq.Bhokar.

Dist.Nanded.