Are you know about the Forex reserves, Here we are going to discuss the Forex reserves, It’s a very interesting term which must be known for those how are working in the finance department and the stock market. Forex reserves are always maintained by RBI only in India. Foreign Exchange reserves or Forex reserves are assets such as foreign currencies, gold reserves, treasury bills, etc retained by a central bank.
The Central Bank of the Republic of China (Taiwan) has the highest foreign reserve “Internal Reserves and Foreign Currency Liquidity.” Accessed March 6, 2020.
If we talk about which country has the highest currency in the world, it is none other than Kuwaiti Dinar or KWD. The currency code for Dinars is KWD. If we talk about the world’s weakest currency then the simple answer is the Iranian Rial. So all currencies are evaluated from Dollar. Some economists are talking about “yuan” because China wants its currency, the yuan, to replace the U.S. dollar as the world’s global currency.
According to the Reserve Bank of India (RBI) data, the country’s foreign exchange (forex) reserves touched a lifetime high of USD 555.12 billion after it surged by USD 3.615 billion in the week ended 16th October 2020.
What are forex reserves?
Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies assets (FCA)(capital inflows to the capital markets, FDI, and external commercial borrowings), which can include bonds, treasury bills, Special Drawing Rights, Reserve position with the International Monetary Fund (IMF)
and other government securities accumulated by India and controlled by the RBI
It is known to be important that foreign exchange reserves are held in U.S. dollars.
The one fact about forex reserve is important to know for us is that the current situation stands in stark contrast to one in the year 1991 when India had to pledge its gold reserves to stave off a major financial crisis. March 1991, India had forex reserves of a mere $5.8 billion today, the country can depend on its soaring foreign exchange reserves to tackle any crisis on the economic front.
Why are forex reserves rising despite the slowdown in the economy?
- The rise in investment by foreign portfolio investors and increased foreign direct investments (FDIs). in Indian stocks and foreign direct investments (FDIs). Foreign investors have acquired stakes in several Indian companies over the past several months.
- The fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange. saving precious foreign exchange. Similarly, overseas remittances and foreign travels have fallen steeply.
- After pulling out Rs 60,000 crore each from debt and equity segments in March, Foreign Portfolio Investments (FPIs), who expect a turnaround in the economy later this financial year, have now returned to the Indian markets.
What’s the significance of rising forex reserves in India?
The rising reserves have also helped the rupee to strengthen against the dollar.
Government in meeting its foreign exchange needs and external debt obligations and maintain a reserve for national disasters or emergencies.
Supporting and maintaining confidence in the policies for monetary and exchange rate management
Provides the capacity to intervene in support of the national or union currency.
The central bank (RBI) supplies foreign currency to keep markets steady.
To keep the value of their currencies at a fixed rate.
In a conservative view, forex should only contain foreign banknotes, foreign treasury bills, foreign bank deposits, and long and short-term foreign government securities. But, in practice, it also contains gold reserves, IMF reserve positions, and SDRs, or special drawing rights. The latter figure is more easily available and is officially known as the international reserves.
What does the RBI do with the forex reserves at its disposal?
- The Reserve Bank functions as the custodian and manager of forex reserves, and operates within the overall policy framework agreed upon with the government.
- RBI sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens
Where are India’s forex reserves kept?
- The RBI Act, 1934 provides the overarching legal framework for deployment of reserves in different foreign currency assets and gold.
- As much as 64 per cent of the foreign currency reserves are held in securities like Treasury bills of foreign countries, mainly the US; 28 per cent is deposited in foreign central banks; and 7.4 per cent is deposited in commercial banks abroad, according to RBI data.
- India also held 653.01 tonnes of gold as of March 2020, with 360.71 tonnes being held overseas in safe custody with the Bank of England and the Bank for International Settlements, while the remaining gold is held domestically.
Is there a cost involved in maintaining forex reserves?
It is very interesting about the interest like we kept money in bank and banks are given interest on the deposits. Like this RBI also received the return on India’s forex reserves which kept in foreign central banks and commercial banks is negligible analysts say it could be around 1 percent, or even less than that, considering the fall in interest rates in the US and Eurozone.
What could be the impact of an early hike in interest rates by Fed’s?
The Fed’s indication of a hike in interest rates earlier than expected resulted in a rise in bond yields and strengthening of the dollar. At the same time, it impacts currencies and stock markets in emerging economies.
News of a hike in interest rate in the US leads not only to an outflow of funds from equities into US treasury bonds but also to an outflow of funds from emerging economies to the US. Experts say a rise in yields leads to a situation where they start competing with equities, and this impacts market movement. The rupee is also expected to come under pressure as the dollar strengthens.
