India’s Foreign Exchange touches all time high of 457.468 billion USD

RBI announced that Foreign Exchange Reserves of India has swelled by 2.52 billion USD in the week that ended on December 27, 2019. The Central Bank also said that the country’s special drawing rights with the IMF (International Monetary Fund) dipped by 2 million USD and the reserve position increased by 58 million USD. Currently, India SDR with the IMF is 1.4441 billion USD and the reserve is 3.7 billion USD.

Special Drawing Rights

The special drawing rights (SDR) is a kind of foreign exchange reserve held by countries in terms of leading currencies with the International Monetary Fund. It was created in 1969. The SDR is regarded as the basket that comprises of four major currencies of the world. It currently includes USD, British pound, Euro and Yen (Japan). The composition of the basket is reviewed once in five years. During the review, the weightage of the currency also gets altered.

Reserve Position

The Reserve Position or Reserve Tranche Position is the difference between IMF holdings of a country and the designated IMF quota of the country. The financing of the IMF is governed through the quota allocated to a country. This quota is payable in special drawing rights of the country and also in member’s own currency.

The part of the quota that can be withdrawn without any interest is the Reserve Tranche Position.

How do reserves affect Currency?

Reserves act as shock absorbents of negative effects of exchange rate of a currency. The central bank of a country (like RBI) use these reserves to maintain a stable exchange rate. The bank buys or sells the reserves depending on the direction the exchange prices are intended to move.

India does not intend to maintain a specific exchange rate. It holds reserves in terms of other currencies in order to reduce the volatility of rupee in the market. (Volatility is the risk involved in change of exchange rates).

In simple words, when RBI buys dollars to support a weakening rupee. Buying dollars creates infusion of rupees into the system leaving an inflationary effect on the economy.