Analysis: India’s rising Forex reserves

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According to the data of RBI, India’s foreign exchange reserve increased by 2.5 billion dollars to a record high of 457.46  billion dollars in the last week of December 2019 and recently it has crossed half trillion dollars for the first time in the week of June 5. Foreign exchange reserves are cash and reserve assets held by a Nation’s Central Bank. They can be used to influence the exchange rate of country’s currency or meet a current account deficit. Forex Reserves have four components, of which assets and gold are the biggest. The movement in foreign currency assets expressed in dollar or rupee terms in mainly due to exchange rate fluctuations of currencies in the basket. In this basket, other currencies like the rupee, yen and euro have let to the movement of currencies against the dollar. Which is manifesting itself in an increase in forex reserves.

Significance of this development

The Rising of forex reserve give a great comfort to the Indian Government and the RBI in managing India’s external and internal monetary issues at a time when the economic development is set to decrease by 1.5 percent in 2020-21. Forex reserve of the country plays a crucial or significant role in maintaining the value of the currency, to controlling of inflation, to regulating the current account deficit and also it plays a very important role in international trade in terms of import and export. Indian currency that is the rupee has also been strengthened because of this rising forex reserve against the dollar. It will also help to maintain reserves for emergencies or any natural disaster.

What is Forex Reserve?

The Forex reserves are also known as Foreign exchange reserve, Foreign currency reserves or Foreign reserves. These Foreign Reserves are the Foreign currencies held by a nation’s Central Bank (RBI). There are seven reasons why banks hold reserves but the most significant reason is to deal with their currencies’ values. Simply, we can say that the total amount of foreign currency held by the Nation’s Central Bank (RBI) is known as the forex reserve and these foreign reserves include foreign bank deposits, foreign banknotes, foreign treasury bills and short and long-term foreign government securities and etc. Such, forex reserve are also utilized by nations to reimburse their credits which they have taken from another nation. The foreign exchange reserves  influences the foreign exchange rate of its currency and also maintains confidence in financial markets. The forex reserves allow the reserve bank of India (RBI) to purchase domestic currency which is a liability to the central bank.

Reasons for its rise

The rise is the foreign portfolio investors in Indian stocks and Foreign Direct Investment (FDI) is the main reason for the rise in forex reserve. In this pandemic all other countries economic growth has also slowed down and India’s higher growth as compared to other developed countries is attracting investors or foreign capital Several Indian companies had been acquired by foreign investors in the last two months. Oil import bill has been brought down as the oil prices have fallen which saves the precious foreign exchange. The forex reserves have grown by dollars 73 billion over the last nine months since, the announcement to cut corporate tax rates was started with the finance minster. The Indian markets have seen the foreign portfolio investment taking a turn around and bringing the stocks worth over dollar 2.75 billion. The reliance industries subsidiary, jio platforms has seen a serious of forex inflows which is said to be a rise in the forex investment.

Critical Analysis

India is the largest gold consuming country, than also it has much less share of gold in the total forex reserve than most developed countries. The foreign exchange reserves are correlated to the Indian rupee position very closely. When rupee value decreases, the reserves also go down. Financial assets which are denominated in the foreign currencies, bonds, gold, cash and bank deposits are included in the foreign exchange reserves of India. In the year of 2003, December the forex reserve of India crossed dollar 100 billion. The forex reserve of India have increased by 48% post 2008 global financial crises. The Reserve Bank Of India bought 200 tons of gold in 2009from the International Monetary Fund (IMF) under its forex reserve management program as stated by IMF’s official press release. In the year 2020 the India’s foreign exchange reserve have crossed dollar 500 billion on June 5th.

Conclusion

Over the past years the foreign exchange reserves have significantly changed as the analysis reveals. In the year 2020 as we said the foreign exchange reserve of India have crossed half billion dollars with dollar 463.630 billon dollar  of foreign exchange assets components, around dollar 32. 352 billion gold reserves, around 1.442 billon of special drawing rights with the IMF and around dollar 4.278 billion reserve position. Overall, the research states that forex reserves have another names like foreign exchange reserves, foreign currency reserves and etc. It also noted that how it is important for the Indian Government to have a stable forex reserves like to pay the import bills, to maintain the confidence of investors in Indian market, it will also help to maintain reserves for emergencies as above said and Reserve bank of India also take necessary steps to make sure that there is proper balance of forex reserves in India.

Author: Bakul from Delhi Metropolitan Education, GGSIPU.

Editor: Silky Mittal, Junior Editor, Lexlife India.

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