India: 5th largest Forex reserve holder in the world

As of 25th June, 2021, India has surpassed Japan, China, Russia and Switzerland to become the world’s fifth-largest foreign exchange reserve holder with $608.99 billion. This was mentioned in the Lok Sabha on 20th July, 2021 by Pankaj Choudhary, MoS Finance.

 

Key Points

  • The Reserve Bank of India and the Government of India are actively monitoring the country’s external position and accordingly fine-tuning the various policies and regulations so as to ensure strong macroeconomic growth of India.
  • India’s balance of payments has surplused in both the capital and current accounts in the year 2020-21 which largely contributed to the gains in the foreign exchange reserves of the country.
  • India’s present foreign exchange reserves are sufficient enough to provide a buffer against unforeseen external shocks and also to cover imports for more than 18 months.
  • The RBI regularly undertakes various measures to diversify the currency reserves of the country by increasing operations in the Forex swap and repo markets, exploring new markets or products and purchasing of gold. All this is done while adhering to liquidity and safety criteria.
  • The RBI’s intervention in the foreign exchange market to smooth out valuation changes due to movement of the US dollar against other international currencies in the reserve basket, exchange rate volatility, movement in gold prices, inflow of aid receipts and interest earnings from the deployment of foreign currency assets are the main causes for the variation in the country’s Forex reserves.
  • A rising foreign exchange reserves which is accompanied by current account deficit shows a balance of payments surplus.

 

Forex Reserves

The Forex reserves are assets which are held by the central bank of a country and it mainly comprise of bonds, foreign currencies, gold, bank deposits, financial assets and special drawing rights.

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