When
entire country is under lockdown due to the pandemic COVID19, there is
something to cheer about for India. India’s foreign exchange reserves are
rising and are expected to hit the $500 billion mark soon. In the month May, it
jumped by $12.4 billion to an all-time high of $493.48 billion.
Leaving
behind the 1991 crisis
Many
youngsters are not aware of the Forex crisis of 1991, when India had to pledge
its gold reserves to escape a major financial crisis. India can now confidently
depend on its soaring Forex reserves to tackle any crisis on the economic
front. There has been a massive increase of 8,400 per cent in the level of Forex
from $5.8 billion as of March 1991 to the current level.
What
are Forex Reserves?
Reserve
Bank of India Act and the Foreign Exchange Management Act, 1999 has been
enacted to set the legal provisions for governing the foreign exchange reserves
in the country.
The
Central Bank of the country accumulates foreign currency reserves by purchasing
from authorized dealers in open market operations.
The
Forex reserves of India consist of below four categories:
Foreign
Currency Assets
Gold
Special
Drawing Rights (SDRs)
Reserve
Tranche Position
According
to the International Monetary Fund (IMF),
official Forex reserves are held to promote and maintain confidence in the
monetary policies and exchange rate management including the capacity to
intervene in support of the national currency.
It
will also minimizes external vulnerability by maintaining liquid foreign
currency to absorb financial shocks during times of crisis or when access to
borrowing is curtailed.
Why
is Forex rising despite the slowdown in the economy?
The
rise in inflow of foreign portfolio investors in Indian stocks and foreign
direct investments (FDIs) is the major reason for the rise in forex reserves.
In the last two months, foreign investors had acquired stakes in several Indian
companies.
It
is expected to rise further and soon it will cross the $500 billion mark as
Reliance Industries subsidiary, Jio Platforms, has engaged in a series of
foreign investments totaling Rs 97,000 crore.
Similarly,
the steep fall in the global crude oil prices has brought down the oil import
bill, saving the precious foreign exchange.
Due
to prolonged lockdown, overseas
remittances and foreign travels have fallen steeply – down 61 per cent in April
from $12.87 billion.
What’s
the significance of rising forex reserves?
At
the time of falling GDP growth rate, the rising forex reserves give a safety
cushion to the government and the RBI in managing India’s external and internal
financial issues. It’s a big relief in the event of any financial crisis and
enough to cover the import bill of the country for an entire year.
The
rising Forex reserves have also helped the rupee to strengthen its position against
the dollar.
As
of now, the forex reserves to GDP ratio is around 15 per cent.
Such
huge Forex reserves will provide a level of confidence to markets that a
country can meet its external obligations and can back its domestic currency.
What
does the Central Bank do with the forex reserves?
The
RBI functions operates within the overall policy framework agreed upon with the
central government and it act as the custodian and manager of forex reserves.
The
RBI uses the reserves for specific purposes such as maintaining the value of rupee
against dollar.
Where
are India’s forex reserves kept?
The
RBI Act, 1934 provides the legal framework for the deployment of reserves in
different places like foreign currency assets and gold. Around 64 per cent of
the foreign currency reserves is held in the securities like Treasury bills of
foreign countries, mainly the US. 28 per cent is deposited in foreign central
banks and 7.4 per cent in commercial banks abroad.
The
share of gold in the total foreign exchange reserves has also increased from
about 6.14 per cent as at end-September 2019 to about 6.40 per cent as at
end-March 2020 in value term.
Conclusion
Many
known economists has suggested that the forex reserves should be used for
infrastructure development in the country. However, the RBI had opposed the
plan. At the time of pandemic when entire country is on halt, this reserve is a
big relief for the government and it will help our country to maintain its
position in the global market.
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Very well described
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