- Foreign exchange reserves reached $ 541.431 billion for the week ending August 28
- The share of gold in the currency reserves increased from September 2019 to March 2020
In the last week of August, the country's foreign exchange reserves increased by $ 3.883 billion to reach $ 541.431 billion. According to data released by the Reserve Bank of India (RBI), foreign exchange reserves stood at $ 537.548 billion for the week ended August 21. On June 5, foreign exchange reserves crossed the $ 500 billion mark for the first time, reaching $ 501.7 billion, according to RBI data.
That's why foreign exchange reserves are increasing
- Despite the economic slowdown, the biggest reason for the increase in foreign exchange reserves is the increase in foreign direct investment (FDI) in Indian stock markets.
- Over the past few months, Foreign Portfolio Investors (FPIs) have increased stakes in several Indian companies.
- In March, FPIs withdrew about Rs 1.20 lakh crore from India's debt and equity segment, but FPIs are back in the Indian markets by the end of this year, with the economy expected to return to its old state.
- Apart from this, the country's import bill has come down due to the fall in crude prices. This has reduced the burden of foreign exchange reserves. Similarly, there has been a decrease in sending money from abroad and travel abroad. This has also reduced the burden on foreign exchange reserves.
- Finance Minister Nirmala Sitharaman announced a cut in corporate tax rates on 20 September 2019. Since then, the foreign exchange reserves have been steadily increasing.
Growth in foreign exchange reserves is a good sign despite decline in GDP
There is an atmosphere of sadness in the economy globally due to the coronavirus epidemic. Due to this, the country's gross domestic product (GDP) declined by 23.9 percent in the first quarter (April-June quarter) of the current financial year. It declined due to manufacturing activities and stability in business. In such a situation, the increase in foreign exchange reserves is a good sign for the country's economy.
Today 1991 opposite situation
Today's situation of foreign exchange reserves is completely opposite to 1991. India had then pledged the gold reserve to come out of the major financial crisis. The country's foreign exchange reserves in March 1991 were only $ 5.8 billion. But today the country can face any economic crisis on the basis of foreign exchange reserves.
Major Assets of Foreign Exchange Reserves
- Foreign Currency Assets (FCA).
- Gold Reserve.
- Special Drawing Rights (SDR).
- Reserve status of the country with the International Monetary Fund (IMF).
Assets share in foreign exchange reserves last week
|IMF Reserve Status
note: The amount is in billion dollars.
Importance of foreign exchange reserves for the economy
- The increase in foreign exchange reserves helps the government and RBI to deal with any external or internal financial crisis arising out of the decline in economic growth.
- It provides a comfortable position to the country in times of crisis on the economic front.
- The current foreign reserves are enough to handle the country's import bill for a year.
- The increase in foreign exchange reserves helps the rupee strengthen its position against the dollar.
- Currently, the foreign exchange reserves GDP ratio is around 15 per cent.
- Foreign exchange reserves give the market of economic crisis the confidence that the country is capable of dealing with external and domestic problems.
RBI manages foreign exchange reserves
- The RBI serves as the custodian and manager of foreign exchange reserves. This work is done according to the policy framework prepared with the government.
- The RBI uses foreign exchange reserves to correct the position of the rupee. The RBI sells dollars when the rupee weakens. When the rupee is strong then the dollar is bought. Many times RBI also buys dollars from the market to increase foreign exchange reserves.
- When the RBI increases the dollar, it releases a rupee equal to that amount. This additional liquidity is managed through RBI bond, security and LAF operations.
Where are the foreign exchange reserves kept
- The RBI Act 1934 provides the legal framework for holding foreign exchange reserves.
- 64 percent of the country's foreign exchange reserves are in the form of treasury bills etc. abroad. It is mainly kept in America.
- According to RBI data, currently 28 per cent of foreign exchange reserves are kept in central bank of other countries and 7.4 per cent in commercial bank.
- In March 2020, there was 653.01 tonnes of gold in foreign exchange reserves. Of this, 360.71 tonnes of gold is kept under the safe custody of Bank of England and Bank for International Settlements abroad. The remaining gold is kept in the country itself.
- The share of gold in foreign currency reserves in dollar value has increased from 6.14 per cent in September 2019 to 6.40 per cent in March 2020.