India’s forex reserves rose by USD 204 million to USD 532.868 billion for the week ended October 7 on an increase in the value of gold holdings, the Reserve Bank said on Friday, October 14. In the previous reporting week, the overall reserves had dropped by USD 4.854 billion to USD 532.664 billion.
In the preceding week ended September 30, the overall reserves had dropped by USD 4.854 billion to USD 532.664 billion. The reserves had been falling for many weeks now as the central bank deploys the kitty to defend the rupee amid pressures caused majorly by global developments.
In October 2021, the country’s forex kitty had reached an all-time high of USD 645 billion.
Foreign Currency Assets (FCAs), a major component of the overall reserves, saw a drop of USD 1.311 billion to USD 471.496 billion during the week ended October 7, according to the Weekly Statistical Supplement released by the Reserve Bank of India (RBI) on Friday.
Expressed in dollar terms, the FCAs include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
The rise in the overall reserves for the week ended October 7 was on account of a sizable increase in the value of the gold holdings, which rose USD 1.35 billion to USD 38.955 billion and the Special Drawing Rights (SDRs) rose by USD 155 million to USD 17.582 billion, RBI said
The country’s reserve position with the International Monetary Fund (IMF) rose by USD 10 million to USD 4.836 billion in the reporting week, the apex bank data showed.
What is Foreign Exchange Reserve?
Foreign exchange reserves are important assets held by the central bank in foreign currencies as a reserve. They are usually used for backing the exchange rate and determining monetary policy. In the case of India, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights. Most of the reserves are usually held in US dollars given the currency’s importance in the international financial and trading system. Some central banks also keep reserves in Euros, British pounds, Japanese yen, or the Chinese yuan in addition to their US dollar reserves.
Why are these reserves so important?
All international transactions are settled in US dollars and, therefore, needed to support India’s 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 disturbance in foreign capital flows, which could arise during a crisis. Holding liquid forex thus gives a cushion against such impacts and gives the confidence that there would still be enough forex to help the country’s crucial imports in case of external shocks.
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