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FOREX RESERVES

UPSC CURRENT AFFAIRS | MAKING USE OF FOREX RESERVES | 25TH JULY | INDIAN EXPRESS

/ July, 2022, UPSC Daily Current Affairs

SYLLABUS SECTION: GS III (ECONOMY)

WHY IN THE NEWS?

India’s foreign exchange forex reserves have dipped to $572.71billionas of July15, form a peak of $642.45 billion on September 3.

FOREX EXCHANGE RESERVES:

  • Foreign Exchange Reserves are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.
  • A country typically accumulates forex reserves when its earnings from export of goods and services exceed payments against imports.
  • The current account surpluses result in a build-up of reserves, as the central bank mops up all the excess foreign currency flowing into the country.

THE OUTLIER

  • Table1shows the top 12 countries holding the highest foreign exchange reserves at the end of 2021.
  • India is an outlier (along with the US and Brazil) among the countries that have accumulated sizeable forex reserves.
  • Only in one outofthe11years–2020–has it run a surplus on the current account of its balance of payments.
  • The capital flows attracted by India have not only financed its excess of imports over exports, but also contributed to an accretion to the official reserves.
SOURCES OF ACCRETION
  • More than 50% of the $603.35 billion accretion has happened in the last eight years.
  • In none of the four periods, however, has reserve accumulation been an outcome of export of goods surpassing imports.
  • On the contrary, the combined merchandise trade deficit during the eight years from 2014-15 to 2021- 22 was close to $1.2 trillion.
  • This deficit partly offset by a net surplus of $968billionon the “invisibles” account of the balance of payments. Invisibles mainly comprise receipts from export of software services, remittances by overseas Indians, and tourism
  • The invisible surpluses have by and large contained the country’s current account deficits to manageable levels, with some periods (1998-99 to 2005-06) and individual years (2001-02, 2002-03, 2003-04 and 2020-21) even registering surpluses.
  • Besides current account deficits and capital flows, there is another source of reserve accretion or depletion: valuation effect.
  • Foreign exchange reserves are held in the form of dollars as well as non-dollar currencies and gold, whose value is, in turn, influence by movements in exchange rates and gold prices.
  • A depreciation of the US dollar or higher gold prices, then, causes valuation gains in the existing stock of reserves.
  • A strong dollar or falling gold prices, likewise, brings down the value of the non-dollar portion of the reserves.
  • The forex reserves is accumulated as a buffer against currency volatility, external shocks and sudden stops in capital flows.

Read more: UPSC CURRENT AFFAIRS

SOURCE: INDIAN EXPRESS