Why is it in the news?

As reported by the Reserve Bank, India’s forex reserves increased by $4.039 billion to reach $598.897 billion for the week ending September 1 2023.

About Forex Reserves

• Forex reserves are considered the health meter of a country’s economic stability.
• They consist of assets such as foreign currencies, gold reserves, and treasury bills held by a country’s central bank.
• These reserves serve various purposes, including checking the balance of payments, managing foreign exchange rates, and maintaining financial market stability.
• They are governed by the RBI Act and the Foreign Exchange Management Act, 1999.
• Four Categories of Forex Reserves:
• Foreign Currency Assets: The largest component, comprising approximately 80% of the total portfolio.
• Investment in Gold: Reserves held in the form of gold.
• Special Drawing Rights (SDRs): Allocated by the International Monetary Fund (IMF).
• Reserve Tranche Position: A component of IMF reserves.

Significance

• Extreme Vulnerability: Provides foreign currency liquidity to absorb economic shocks during crises or when borrowing access is restricted.
• Facilitating External Trade: Supports external trade and payments, ensuring the orderly development of the foreign exchange market.
• Currency Stabilization: Serves as a backup fund to stabilize the domestic currency in case of rapid depreciation or insolvency.
• Rupee Depreciation Control: Allows the central bank (RBI) to sell foreign currency (e.g., dollars) to prevent excessive rupee depreciation.
• International Reputation: A robust forex reserve demonstrates a country’s reliability in international trade, attracting foreign trade partners.