India's foreign exchange reserves or FOREX refers to assets held by the Reserve Bank of India (RBI) in foreign currencies. The foreign exchange reserves of India are holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than the Indian rupee.
The Reserve Bank of India (RBI) accumulates foreign currency reserves by purchasing from authorized dealers in open market operations. Foreign exchange reserves of India act as a cushion against external shocks and provide liquidity, ensuring that the country can meet its external obligations like payment for imports and interest payments on the loan taken.
FOREX consists of 4 components which are Foreign currencies, Gold, SDR and Reserve position at IMF. Let’s see them in detail.
The first is the foreign currencies reserve which is the most significant component of the Indian forex reserves. It includes major currencies like the US Dollar, the Euro, and the British Pound.
RBI buys the foreign currency from the Banks in India. It also invests in the sovereign bonds of other nations like US, UK and Europe. Holding foreign currency Is the biggest part of India’s FOREX.
Holding these currencies provides liquidity and enables the country to pay for international trade transactions.
The second is Gold. Gold reserves are another essential component of Indian forex reserves. Gold is a hedge against inflation and provides a safety net during economic uncertainties. It is the second biggest component of India’s FOREX.
The third is the Special Drawing Rights or the SDRs. Special Drawing Rights (SDRs) are international reserve assets the IMF has created. They supplement the foreign exchange reserves of the member countries. Click here to know more about SDRs.
And the fourth is the Reserve Portion in IMF. The reserve portion in the IMF represents India's quota in the International Monetary Fund. It reflects India's position and voting power within this global financial institution.
In March 2024, India’s FOREX reserves have touched 643 billion dollars.
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