Forex Reserves cross record $600 Billion marks to Hit New High

Introduction:

The Forex Reserves of India currently stands at a record $ 605 billion as of 4^th June 2021. When RBI Governor, Mr. Shaktikanta Das addressed the findings of MPC he told that the latest reserves will cross the $ 600 billion mark through the end of the meeting. We have analyzed few points through which we will discuss this.

1.Bifurcation of the reserves:

• The foreign currency reserves stand at $560.89 billion from which the majority will be in dollar terms and the rest in other currency terms.
• The gold reserves account for $37.6 billion and special drawing rights stand at $1.5 billion.

The reserve positions in International Monetary Fund (IMF) stand at $5 billion

2. Reasons for the rise in the Forex Reserves of India in the last 1 year?

• The Foreign Direct Investments (FDIs) Inflows during the last 1 year has made a record high of around $60 billion and it is one of the major reasons for the rise in the Forex Reserves of the country.
• Foreign Institutional Investors (FIIs) have also helped in creating more reserves and this also helped SENSEX to touch 52,000 points mark and Nifty to almost touch 16,000 points mark in the last 1 year.

3.Top 5 countries with the highest amount of Forex Reserves (As of April 2021):

• The first position is held by China with the highest amount of Forex Reserves with $3.3 trillion.
• The second position is held by Japan with the second-highest amount of Forex Reserves with $1.3 trillion.
• The third position is held by Switzerland with the total amount of Forex Reserves at $ 1.07 trillion.
• The fourth position is held by Russia with a total amount of Forex Reserves at $605.2 billion which is just above the level of India.
• India holds the fifth position with a total amount of Forex Reserves at $ 605.008 billion and it can soon overtake Russia.
• The United States does not require to hold Forex Reserves in currency terms as the Dollar itself is considered as a reserve. They hold a good amount of gold as a reserve.

4. Importance of holding Forex Reserves in a country:

• Last year the FIIs and other foreign investors redeemed over 10 billion dollars from the Indian markets. And if the Reserve Bank of India (RBI) did not have a sufficient amount of Forex reserves, the domestic currency would have depreciated by a large extent.
• If the demand does not match with supply it can lead to huge depreciation in domestic currency and appreciation of the foreign currency.
• India being a net importer will face huge losses with the weaker domestic currency as import expense will grow faster than export revenue. Hence, foreign exchange reserve becomes important to maintain for the country.
• The Reserve Bank of India (RBI) has to make a balance in the currency through the help of Forex Reserves.

Conclusion:

The Reserve Bank of India (RBI) does not always intervene in the markets to maintain the demand-supply equation but when the situations are not supportive, RBI will take the help of Forex to maintain the balanced level of appreciation or depreciation of the currencies.