What is the News?
The Minister of State for Finance has informed Lok Sabha about the state of India’s Forex Reserves.
State of India’s Forex Reserves:
- India’s forex reserves currently stand at $608.99 billion as on June 25, 2021.
- India has emerged as the fifth largest foreign exchange reserves holder in the world after China, Japan, Switzerland and Russia.
- Further, India’s foreign exchange reserves position is comfortable in terms of import cover of more than 18 months and provides a cushion against unforeseen external shocks.
Steps taken by RBI: RBI takes regular steps for diversification of forex reserves by:
- Scaling up operations in forex swap and repo markets
- Acquisition of gold and
- Exploring new markets/products
Reasons for Variation in Forex Reserves: Variation in India’s forex reserves is primarily due to:
- RBI’s intervention in the foreign exchange market to smoothen exchange rate volatility
- Valuation changes due to the movement of the US dollar against other international currencies in the reserve basket
- Movement in gold prices
- Interest earnings from the deployment of foreign currency assets and
- The inflow of aid receipts.
Factors on which External Sector Stability Depends: The overall stability of the external sector depends on the following components of the balance of payments:
- Exports and imports of goods and services
- Remittances (transfers)
- Income in the current account,
- The size of net capital flows and
- External debt.
Note: India is comfortable in most of these external sector vulnerability indicators.