Q. Why is this in news ?
A. As per the Reserve Bank of India (RBI) data, India's foreign exchange (forex) reserves touched a record high of USD 541.431 billion in the week ended 28th August 2020.
Q. What are Forex Reserves?
A. Foreign exchange reserves are assets denominated in a foreign currency that are held on reserve by a central bank. These may include foreign currencies, bonds, treasury bills and other government securities.
Q. What are objectives behind holding Forex Reserves?
- Supporting and maintaining confidence in the policies for monetary and exchange rate management
- Provides the capacity to intervene in support of the national or union currency.
- Limits external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.
Q. What about Forex Reserves in India?
A. Forex reserves are external assets accumulated by India and controlled by the RBI in the form of:
- Gold
- SDRs (special drawing rights of the International Monetary Fund - IMF)
- Foreign currency assets (capital inflows to the capital markets, Foreign Direct Investment and external commercial borrowings)
Q. What are the reasons for High Forex Reserves?
- Rise in investment by foreign portfolio investors and increased foreign direct investments (FDIs).
- The sharp jump in reserves started with the Finance Ministry’s announcement in 2019, cutting corporate tax rates.
- Fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange.
- Dollar outflow from overseas remittances and foreign travels have fallen steeply.
Q. What is the significance of rising forex reserves?
- Comfortable Position for the Government: The rising forex reserves give comfort to the government and the RBI in managing India’s external and internal financial issues at a time of major contraction (23.9%) in economic growth.
- Managing Crisis: It serves as a cushion in the event of a Balance of Payment (BoP) crisis on the economic front.
- It is enough to cover the import bill of the country for a year.
- Assist the government in meeting its foreign exchange needs and external debt obligations.
- Rupee Appreciation: The rising reserves have also helped the rupee to strengthen against the dollar.
- Confidence in Market: Reserves will provide a level of confidence to markets and investors that a country can meet its external obligations.
