New Delhi/ Mumbai: India's foreign exchange reserves increased $1.49 billion to reach about $641 billion in the week ending October 15, as per RBI data published on Friday. The central bank said that the rise can be attributed to an increase in foreign currency assets (FCAs) - which is a major component of overall reserves. Gold reserves spiked by $557 million to reach approx $38.58 billion in the same time period. As per the data, foreign currency assets rose by $950 million to approx $577.95 billion. The foreign currency assets include the effect of appreciation or depreciation of non-U.S. currencies such as the euro, pound and yen held in foreign exchange reserves.
In the previous week ended October 8, the reserves had increased by about $2.04 billion to $639.52 billion. The reserves had touched a lifetime high of $642.45 billion in the week ended September 3, 2021.
Special drawing rights with International Monetary Fund (IMF) fell by $21 million to reach $19.25 billion in the reporting week. India's reserve position with the IMF rose $6 million to reach $5.23 billion.
What is Foreign Exchange Reserve?
Foreign exchange reserves are important assets held by the central bank of a particular country 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, USD, and the IMF’s quota for Special Drawing Rights (SDR). 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 USD reserves.
Why are Foreign Exchange Reserves so important?
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.
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