What are forex reserves? Forex which is foreign exchange reserves are cash and other reserve assets such as gold held by a central bank or other Monetary Authority that are primarily available to balance payments of the country. Foreign exchange reserves include bank notes, deposits bonds, treasury bills and other government securities. Some countries hold a part of the reserves in gold and special drawing rights are also considered reserve assets for convenience. The cash or securities are held by the Central Bank of the reserve or other currency and the holdings of the foreign country are tagged or otherwise identified as belonging to the other country without them actually leaving the vault of that central bank. India’s forex reserves have grown from 431 USD billion in January 2020 to 612 USD billion in July 2021, around 40% increase. Though forex reserves have been growing continuously over the past three decades the growth rate has been faster than ever over the past 18 months. India has third highest forex reserves. India’s forex reserves comprise foreign currency assets (FCA), gold reserves, special drawing rights l(SDRs) and the country’s reserve position with the International Monetary Fund (IMF).
On a weekly basis, FCA, the largest component of the forex reserves, edged lower by 3.365 USD billion to 573.009 USD billion. The growth of India in foreign exchange reserves was largely due to an increase in foreign currency assets FCA, gold reserves were up by 377 million USD to 37.333 billion. The special drawing rights (SDR) with the International Monetary Fund (IMF) were up by 1 million USD at 1.548 billion USD. The forex reserves are commonly used to support the exchange rate and set monetary policy. Most of the reserves are held in U.S. dollars because of the currency is important in the international financial and trading system. Currently China has the largest reserves followed by Japan and Switzerland. India has overtaken Russia to become the third largest country with foreign exchange reserves. India’s foreign currency holdings fell by 4.3 billion USD to 580.3 billion USD as of March 5. The Reserve Bank of India said on Friday, edging out Russia as 580 billion USD pile India’s reserves enough to cover roughly 18 months of imports have been bolstered by a rare current account surplus rising inflows into the local stock market and foreign direct investment. India’s various reserves adequacy metrics have improved significantly particularly in the last few years, Kaushik Das chief India economist at Deutsch bank said before the latest data was released that the healthy forex reserves position should give enough complete comfort to RBI for dealing with any potential external shock driven capital stop or outflows in the period ahead. We are part of a global economy where trade is made beyond boundaries. A country’s foreign exchange reserves depends on its total imports and exports, a local exporter is paid by its a trading partner in USD, CD or Euros or any other currency.
The trader deposit’s this foreign currency into his local bank and in exchange he receives local currency which he can use for his day to day transactions. The local bank then transfers the foreign currency to the central bank. When a country imports any commodity it has to pay the other country or the foreign trader in their respective currency this leads to decline in foreign exchange reserves. Thus to accumulate foreign exchange reserves a country needs to increase its exports and decrease its imports. The importance of foreign exchange reserves for developing countries is based on the security of home, currency positions, economic growth post maintain liquidity any economic crisis, attract foreign investments, fund infrastructure projects etc. Maintaining a foreign exchange reserve is important for every nation, whether developing or developed. Even every country makes calculated moves to ensure that its foreign reserves never see a fall. There are seven reasons why these reserves are important, forex can secure the position of home currency, can boost economic growth, can maintain liquidity in economic crisis, can attract foreign investment, can need external obligations, can fund infrastructural development and can boost returns.