In News:

• Foreign exchange reserves crossed $400 billion for the first time in four months in the week ended February 1, 2019, according to data released by the Reserve Bank of India.

Explained:

• Total forex reserves grew over $2 billion from $398.17 billion in the week ended January 25 to hit a four-month high of $400.2 billion on February 1.
• The special drawing rights with the International Monetary Fund (IMF) rose by USD 6.2 million to USD 1.470 billion. The country’s reserve position with the IMF also increased by USD 11.2 million to USD 2.654 billion

In past:

• Expressed in US dollars, foreign currency assets include the effect of appreciation or depreciation of non-US currencies such as the euro, pound and yen held in the reserves.
• The reserves had touched a record high of USD 426.028 billion in the week to April 13, 2018. Since then, the forex kitty has been on a slide and is now down by over USD 31 billion.

Forex Reserves Explained:

• In India, Foreign Exchange Reserves are the foreign assets held or controlled by the country central bank. The reserves are made of gold or a specific currency.
• They can also be special drawing rights and marketable securities denominated in foreign currencies like treasury bills, government bonds, corporate bonds and equities and foreign currency loans.
• Foreign exchange reserves act as the first line of defense for India in case of economic slowdown, but acquisition of reserves has its own costs.
• Foreign exchange reserves facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India
• Reserve bank of India Act, 1934 and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves. Reserve Bank of India accumulates foreign currency reserves by purchasing from authorized dealers in open market operations. Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates start rising.

The Foreign exchange reserves of India consists of below four categories:

• Foreign Currency Assets
• Gold
• Special Drawing Rights (SDRs)
• Reserve Tranche Position