Declining Forex Reserve in India

Table of Contents

Forex Reserve in India: Relevance

GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

According to the recently released RBI weekly data, The nation’s forex reserves posted a decline of $678 million during the week ended January 21.

The nation’s forex reserves has reached $634.287 billion against a lifetime high of $642.453 billion in the week ended September 3, 2021.
Reason: One of the reasons of the decrease is the drop in the foreign currency assets (FCA), which forms a vital component of the overall reserves.
- FCA declined by $1.155 billion to $569.582 billion in the reporting week.
FCA include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
Interestingly, gold reserves saw an increase of $567 million to $40.337 billion during the same period.
The Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) fell $68 million to $19.152 billion.

Decrease in forex reserves may cause issues for the government and the RBI in managing the nation’s external and internal financial issues.
Higher forex provides a big cushion in the event of any crisis on the economic front as it provides cover to the import bill of the country for a year.

Higher reserves help the rupee strengthen against the dollar.
A rise in reserves provides a level of confidence to markets that a country can meet its external obligations.
The rise in forex also demonstrates the backing of domestic currency by external assets.
It assists the government in meeting its foreign exchange needs and external debt obligations, and maintain a reserve for national disasters or emergencies.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
To date, a total of SDR 660.7 billion (equivalent to about US$943 billion) have been allocated. This includes the largest-ever allocation of about SDR 456 billion approved on August 2, 2021 (effective on August 23, 2021).
The value of the 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.
The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.

SDR holdings is one of the components of the FER of a country.
IMF has made an allocation of SDR 12.57 billion (equivalent to around USD 17.86 billion) to India in 2021.
The total SDR holdings of India now stands at SDR 13.66 billion (equivalent to around USD 19.41 billion).