India’s foreign exchange reserves have reached a new milestone, standing at $642.63 billion as of March 22, 2024, placing India in the 4th spot globally. This surpasses Russia, ranked 5th with reserves of $590.17 billion, but falls behind Switzerland, occupying the 3rd spot with reserves totaling $868.63 billion. While reaching this impressive milestone, on the same day, the rupee depreciated by 2 paisa, hitting an all-time low at Rs. 83.36 against the US dollar. So what’s the significance of this monumental achievement? Here is what it is:
What is a Foreign Exchange-Reserve?
Foreign exchange reserves, also known as ‘forex reserves’ are stored assets used by a nation to cover expenses related to imports and exports. For example, if country A wishes to import crude oil from country B, it must pay for the oil in a globally recognized means of exchange, such as currency, gold, bonds, or other assets.
What India’s foreign exchange reserve is made of?
Foreign Currency Assets: India’s 88% of foreign reserve is comprised of foreign currency assets. Foreign currency assets includes foreign bank deposits, foreign banknotes (in case USD), foreign treasury bills and other foreign government securities.
Gold Reserves: Gold reserves are one of the most secure and reliable component of foreign exchange reserve. India holds around 803.58 tons of gold held with the Bank of England and Bank for International settlements and the rest is held domestically. Today gold is around 6% of the total foreign exchange reserve of India.
Special Drawing Rights (SDR): These are the International reserve asset set up by the International Monetory Fund(IMF) and it shares a small portion of the total foreign exchange reserve of India.
Reserve Position In The IMF: Reserve position in the IMF is foreign currency asset including Special Drawing Rights. Any member country can draw the rights from IMF at short notice.
What is the use of Foreign Exchange Reserve?
Foreign exchange reserves, managed by the Reserve Bank of India (RBI), play a pivotal role in facilitating the nation’s financial stability and economic growth. These reserves serve as a safeguard, enabling the country to meet various financial obligations, including paying borrowing interests, funding capital and revenue expenditures, and facilitating smooth transactions in international trade, including exports. By effectively managing foreign exchange reserves, the RBI ensures the stability of the Indian rupee and strengthens the country’s resilience against external economic challenges.