- According to the RBI, India’s foreign reserves stood at $578.4 billion in March 2023, a decrease of more than $28 billion from March 2022, $19.7 billion of which was attributable to value changes.
- The fall in the value of the US dollar, along with increased capital flows, has contributed to a jump in reserves this year.
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)
Current Situation: The Effects of US Rate Hikes and Capital Inflows
- Rate Hikes in the United States and Capital Flows: Rate hikes by the United States Federal Reserve have spurred a flow of international investments into the United States Treasury, resulting in capital outflows from India.
- Potential capital inflows: The US Fed has raised interest rates by 75 basis points so far this year. This could enhance capital inflows into emerging markets such as India.
- Improved Balance of Payment (BoP): India’s BoP has greatly improved, with the current account deficit anticipated to be less than 2% of GDP.
- Resumption of Equity Capital Flows: Equity capital flows have resumed, and India continues to draw considerable investments when compared to other emerging market counterparts.
Global Position of India’s Forex Reserves Among Nations:
- India ranks fourth among countries with the largest forex reserves, trailing only China, Japan, and Switzerland.
- Differences in Reserve Accumulation: Due to a competitive export market, most countries sustain large and consistent current account surpluses. India, Brazil, and the United States, on the other hand, have accumulated reserves predominantly through capital flows rather than a significant current account surplus.
The RBI’s Strategy for Diversifying Foreign Exchange Reserves
- The RBI intends to internationalise the Indian rupee in order to lessen dependency on foreign currencies.
- Exploring the Use of Asian Clearing Union Currencies: The RBI is investigating the use of currencies from Asian Clearing Union member countries, including the rupee, for payment and settlement among themselves.
- An agreement with the Central Bank of Sri Lanka allows the rupee to be used as a recognised foreign currency, encouraging trade between the two nations and enabling rupee transactions for Indian visitors in Sri Lanka.
@the end
- While India’s forex reserves have fluctuated due to a variety of circumstances, the country’s ongoing efforts to diversify and increase its reserves position demonstrate the RBI’s proactive attitude.
- The continued emphasis on attracting foreign investment, together with initiatives to internationalise the rupee, may contribute to a more stable and resilient forex reserve management system in the future.
Source: https://m.economictimes.com/news/economy/indicators/indias-forex-reserves-fall-2-91-billion-to-593-2-billion-as-of-june-23/articleshow/101395343.cms#:~:text=Much%20of%20the%20decline%20since,against%20a%20surging%20US%20dollar.