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.

Image of India Foreign Exchange Reserves

Image of India Foreign Exchange Reserves

Image of 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

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