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Source: The post is based on the article “India’s forex reserves rise $6.30 bn to $584.75 bn” published in The Hindu on 15th April 2023
What is the News?
India’s foreign exchange reserves have increased by $6.3 billion to jump to $584.76 billion. This is the highest in nine months.
Note: In October 2021, the country’s forex reserves had reached an all-time high of $645 billion. The reserves have been declining as the RBI deployed the reserves to defend the rupee amid pressures caused by global developments.
What are Foreign exchange reserves?
Forex or foreign exchange reserves are essential assets held by the central bank in foreign currencies as a reserve.
They are usually used for backing the exchange rate and influencing monetary policy. RBI is the custodian of the Foreign exchange reserves in India.
The biggest contributor to India’s foreign exchange reserve is by foreign currency assets followed by gold, SDR and reserve with the International Monetary Fund.
Why are foreign exchange reserves so important?
All international transactions are settled in US dollars and are therefore needed to support our imports.
More importantly, they are needed to support, and maintain confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
It also helps limit any vulnerability because of a sudden disruption in foreign capital flows, which could happen during a crisis. Holding liquid forex thus provides a cushion against such effects and gives the confidence that there would still be enough forex to support the country’s crucial imports in case of external shocks.