India’s forex reserves drop USD 2.42 billion to USD 601.45 billion

What’s in today’s article?

• Why in news?
• What is Forex reserve?
• Composition of India’s Forex Reserves
• Role of the Foreign Exchange Reserve
• Factors affecting Forex Reserve
• News Summary: India’s forex reserves drop USD 2.42 billion to USD 601.45 billion

Why in news?

• India’s forex reserves dropped for the third consecutive week, declining by USD 2.417 billion to USD 601.453 billion as of August 4.

What is Forex reserve?

• Foreign Exchange reserves or Forex reserves are assets such as foreign currencies, gold reserves, treasury bills, etc retained by a central bank or other monetary authority.
  • RBI is the custodian of the Foreign exchange reserves in India.
• It checks the balance payments and influences the foreign exchange rate of its currency and maintains stability in financial markets.

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Composition of India’s Forex Reserves

• The Foreign exchange reserves of India consists of below four categories:
  • Foreign Currency Assets 
  • Gold
  • SDR 
    • The SDR is an international reserve asset used by IMF for internal accounting purposes.
    • Also known as paper gold, the value of 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.
  • Reserve with the International Monetary Fund (also known as reserve tranche position)
    • Reserve tranche position is the difference between the IMF’s holdings of that country’s currency and the country’s IMF-designated quota.

Role of the Foreign Exchange Reserve

• It ensures that RBI has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
• If the value of the Rupee decreases due to an increase in demand of the foreign currency, then RBI sells the dollar in the Indian money market so that depreciation of the Indian currency can be checked.
• A country with a good stock of forex has a good image at the international level because the trading countries can be sure about their payments.
• A good forex reserve helps in attracting foreign trade and earns a good reputation in trading partners.

Factors affecting Forex Reserve

• FPI inflows – Greater FPI inflows increases the forex reserve.
• Dip in crude oil prices – Since India is an oil importing currency, dip in crude oil prices increases the forex reserves. 
• Import savings – Reduction in imports increases the foreign exchange reserves.
• FDI inflows – Greater the FDI inflows, greater will be the forex reserves.
• Dip in gold imports – Gold is a big import component for India. Dip in gold imports increases the forex reserve.

News Summary: India’s forex reserves drop USD 2.42 billion to USD 601.45 billion

• According to the Weekly Statistical Supplement released by the RBI, India’s forex reserves dropped for the third consecutive week.
• As of August 4, it declined by USD 2.417 billion to USD 601.453 billion.
• The foreign currency assets, a major component of the reserves, decreased by USD 1.937 billion to USD 533.40 billion.
  • Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
• In the reporting week:
  • gold reserves were down by USD 224 million to USD 44.68 billion.
  • the Special Drawing Rights (SDRs) were down by USD 171 million to USD 18.274 billion.
  • the country’s reserve position with the IMF was down by USD 86 million to USD 5.099 billion.

Q1) What is Special Drawing Right (SDR)?

The SDR is an international reserve asset used by IMF for internal accounting purposes. Also known as paper gold, the value of 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.

Q2) What is FDI?

FDI stands for “Foreign Direct Investment.” It refers to the investment made by individuals, companies, or governments of one country in business interests located in another country. FDI involves the direct ownership or control of assets in a foreign country, which can include acquiring ownership stakes in businesses, real estate, infrastructure projects, and more.

Source: India’s forex reserves drop USD 2.42 bn to USD 601.45 bn | Financial Express | Business Standard