India’s forex reserves increased by $6.30 billion to $584.75 billion

According to the Reserve Bank of India (RBI), India’s currency reserves climbed by $6.306 billion last week to $584.755 billion.

Why are we debating this?

  • India’s currency reserves reached an all-time high of $645 billion in October 2021.
  • The reserves have been decreasing since then.

What is Foreign Exchange (Forex) Reserve?

  • Foreign exchange reserves are essential assets kept by the central bank as reserves in foreign currencies.
  • They are frequently employed to support the currency and set monetary policy.
  • Foreign reserves in India include gold, dollars, and the IMF’s quota for Special Drawing Rights.
  • Given the currency’s prominence in the worldwide financial and trade system, the majority of reserves are normally stored in US dollars.
  • In addition to US dollars, several central banks retain reserves in Euros, British pounds, Japanese yen, or Chinese yuan.

India’s forex reserves cover:

  • Foreign Currency Assets (FCAs)
  • Special Drawing Rights (SDRs)
  • Gold Reserves
  • Reserve position with the International Monetary Fund (IMF)

Countries with the highest foreign reserves

  • Currently, China has the largest reserves followed by Japan and Switzerland.
  • India earlier overtook Russia to become the fourth-largest country with foreign exchange reserves. (Data from August 2022)
  • China – $3,349 Billion
  • Japan – $1,376 Billion
  • Switzerland – $1,074 Billion
  • Russia – $597.40 Billion

Why are these reserves so important?

  • Because all foreign transactions are settled in US dollars, India’s imports must be supported.
  • More crucially, they must retain public support and confidence in central bank action, whether it is monetary policy or exchange rate intervention to support the home currency.
  • It also helps to minimise any susceptibility caused by sudden disruptions in foreign capital flows during a crisis.
  • Holding liquid foreign currency protects against such consequences and provides assurance that there will be adequate foreign money to cover critical imports in the event of external shocks.

Government initiatives to enhance currency reserves

  • The Government of India has attempted several attempts to boost foreign exchange reserves, such as AatmaNirbhar Bharat, in which India is to be made self-sufficient so that it does not have to import products that India can make.
  • Aside from AatmaNirbhar Bharat, the government has launched programmes such as the Duty Exemption Scheme, the Remission of Duty or Taxes on Export Product (RoDTEP), the Nirvik (Niryat Rin Vikas Yojana), and others.
  • Aside from these initiatives, India is one of the top countries in terms of attracting the most Foreign Direct Investment, hence increasing India’s foreign exchange reserves.
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