India’s foreign exchange reserves rose by $16.663 billion to touch a record high of $633.558 billion in the week ended August 27, 2021, the Reserve Bank of India (RBI) data showed. According to RBI data, forex reserves rose to a record $633.558 billion, mainly due to an increase in Special Drawing Rights (SDR) holdings.
In the reporting week ended August 27, 2021, the country’s SDR holdings rose by $17.866 billion to $19.407 billion, according to weekly data released by the Reserve Bank of India (RBI) on Friday.
India’s forex reserves cover Foreign Currency Assets (FCAs), Special Drawing Rights (SDRs), Gold Reserves and the country’s reserve position with the International Monetary Fund (IMF).
Foreign currency assets (FCAs), a major component of the overall reserves, fell by $1.409 billion to $571.6 billion in the reporting week. Gold reserves rose by $192 million to $37.441 billion. The country’s reserve position with the IMF rose by $14 million to $5.11 billion in the reporting week, the data showed.
What is Foreign Exchange Reserve?
Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves. They are commonly used to support the exchange rate and set monetary policy. In India’s case, 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 keep reserves in Euros, British pounds, Japanese yen or Chinese yuan, in addition to their US dollar reserves.
Countries with the highest foreign reserves
Currently, China has the largest forex reserves followed by Japan and Switzerland. In July 2021, India overtook Russia to become the fourth largest country with foreign exchange reserves.
1. China – $3,371 Billion
2. Japan – $1,386 Billion
3. Switzerland – $1,086 Billion
4. India – $633.55 Billion
5. Russia – $601.00 Billion
Importance of Forex Reserves
All international transactions are settled in US dollars and, therefore, required to support India’s imports. More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency. It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis. Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.