April 18, 2021 1:59:54 am
After declining for two consecutive weeks, the forex reserves jumped by $4.34 billion to reach $581.21 billion during the week ended April 9, according to data from the Reserve Bank of India (RBI). The rise in forex reserves comes alongside the continuing high global liquidity and fund flow into the economy, which is likely to see a relatively higher growth.
Earlier this month, the International Monetary Fund (IMF) raised its growth forecast for the Indian economy by 100 basis points to 12.5 per cent for 2021-22.
In the previous week ended April 2, the reserves had fallen by $2.42 billion to $576.86 billion. During the week ended March 26, they had dropped by $2.99 billion to $579.28 billion. The foreign exchange, or forex, reserves had hit an all-time high of $590.18 billion in the week ended January 29.
During the reporting week of April 9, a rise in foreign currency assets (FCA) — a major component of the overall reserves — fuelled the rise in the forex kitty. FCA increased by $3.02 billion to $539.45 billion, the RBI data, released Friday, showed. Expressed in dollar terms, the FCA include the effect of appreciation or depreciation of non-US currencies such as euro, pound and yen held in the overall reserves.
Gold reserves, meanwhile, rose by $1.30 billion to $35.32 billion in the reporting week, the RBI data showed. The special drawing rights (SDRs) with the IMF rose by $6 million to $1.49 billion during the week ended April 9.
India’s reserve position with the IMF increased $24 million to $4.95 billion in the reporting week, as per the data.
The rising forex reserves could bring some comfort to the government and the RBI in managing the nation’s external and internal financial issues at a time when the economy is facing Covid stress once again and it could have an impact on the GDP growth rate in FY22 as states are announcing lockdowns. It is a big cushion in the event of any crisis on the economic front and enough to cover India’s import bill for a year.
The rising forex kitty could also help strengthen the rupee against the US dollar.
Higher reserves could bring confidence to markets that a country can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its foreign exchange needs and external debt obligations, and maintain a reserve for national disasters or emergencies.
The RBI functions as the custodian and manager of forex reserves, and operates within the overall policy framework agreed upon with the Centre. It allocates the dollars for specific purposes. For example, under the Liberalised Remittances Scheme, individuals are allowed to remit up to $2,50,000 every year.
The central bank uses its forex kitty for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys dollar when the rupee strengthens.
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