India’S Forex Reserves Cross Record $400 Billion- Why Are Forex Reserves Important? (Important) (Download PDF)

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According to Reserve Bank of India (RBI) , India՚s foreign exchange (Forex) reserves crossed $ 400 billion due to sharp rise in foreign currency assets. Increase confidence in the monetary and exchange rate policies.

India Foreign Exchange Reserves
  • This makes India sixth in forex reserves ranking behind China with $ 3,053 billion reserves, Japan with $ 1,188 billion, Switzerland with $ 743 billion, Saudi Arabia with $ 489 billion and Taiwan with $ 441 billion reserves.

Why Are Forex Reserves Important?

  • The Foreign exchange reserves buffer against immediate import requirements for example in the times of war.
  • Increase confidence in the monetary and exchange rate policies.
  • During any crisis, foreign exchange reserves absorb the distress.
  • Enhances capacity of central bank (RBI) to intervene in the foreign exchange market and stabilize the foreign exchange rates providing favorable economic environment and boosting exports.
  • Back the domestic currency by external assets boosting equity markets with foreign countries willing to invest.
  • For example, the increased Forex reserves have strengthened rupee 6 % this year, making it best performer currency among major emerging economies.

Components of Indian Forex

  • Forex assets include foreign marketable securities, monetary gold, special drawing rights (SDRs) and reserve position in the IMF
  • FCAs constitute largest component of the Indian Forex Reserves.
  • Foreign currency assets were $ 376.20 billion, gold reserves at $ 20.69 billion, SDRs of $ 1.52 billion and $ 2.30 billion reserves in IMF

Reasons for Rise in Forex Reserves

  • Sharp increase in foreign currency assets, mainly inflows through foreign direct investments (FDI) in projects and portfolio investments.
  • Foreign investors put in around $ 6.7 billion in stocks and $ 20.55 billion in debt instruments in 2017.

- Published/Last Modified on: October 9, 2017

Economy

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