In News:

India’s foreign exchange reserves recorded a strong rise, increasing by $4.496 billion and reaching an all-time high of $702.28 billion, according to RBI data. This marks the second consecutive week of expansion, following a $2.176 billion rise in the previous reporting week. The jump was primarily driven by a steep increase in the value of gold reserves, even as foreign currency assets registered a decline.

Component-wise Movement of Reserves

1. Foreign Currency Assets (FCA)

• FCAs, which form the largest component of India’s forex reserves, fell by $1.692 billion to $570.411 billion.
• The changes reflect valuation effects due to fluctuations in currencies such as the euro, pound, and yen against the US dollar.

2. Gold Reserves

• Gold holdings rose sharply by $6.181 billion, taking their total value to $108.546 billion.
• The increase is attributed to RBI’s gold purchases and the global surge in gold prices.

3. Special Drawing Rights (SDRs)

• SDR holdings increased slightly by $38 million, reaching $18.722 billion.

4. Reserve Position in the IMF

• India’s reserve position with the IMF declined by $30 million to $4.602 billion.

Overall, the rise in gold assets offset the fall in foreign currency assets, helping the total reserves cross the historic $702-billion mark.

Understanding India’s Forex Reserves

Foreign exchange reserves represent external assets held by the RBI in the form of:

• Foreign currency assets
• Gold reserves
• Special Drawing Rights (SDRs)
• Reserve position in the IMF

These reserves act as a protective financial buffer for the economy.

Objectives and Functions

• Monetary Stability: Helps maintain stability of the Indian Rupee during volatility.
• Crisis Management: Provides liquidity support during balance of payments pressure or external shocks.
• Investor Confidence: Strengthens India’s credibility and ensures macroeconomic stability.
• Trade and Debt Support: Enables smooth settlement of import bills and external debt servicing obligations.

Key Features

• India’s forex reserves are valued on a weekly basis, factoring in global gold prices and New York closing exchange rates.
• The RBI manages these reserves following IMF data dissemination standards, maintaining international transparency.
• Foreign currency assets remain the largest component, followed by gold, SDRs, and India’s IMF reserve position.

Economic Significance

• Economic Security: Acts as an insurance mechanism against currency crises, capital outflows, or external market shocks.
• Policy Flexibility: Allows RBI to intervene in the forex market to curb excessive rupee volatility.
• Global Standing: Reinforces India’s global financial strength, supporting favourable sovereign credit ratings and greater investor trust.