What is meant by “Foreign Exchange Reserve”?

• Foreign Exchange Reserve indicates the reserves held by RBI in the form foreign currency assets, gold, SDR and reserve tranche. Components of foreign exchange reserve:

1. Foreign Currency Assets– Currencies of foreign countries are held in foreign exchange reserves. Apart from currency it also includes foreign currency deposits held by RBI with foreign central banks and the Bank for International Settlements (BIS). 
2. Gold Stock of RBI- The RBI has gold stock as a backup to issue currency and to meet unexpected Balance of Payments (BOP) problems. (BOP problem occurs when a nation is unable to pay for essential imports or service its external debt repayments)
3. SDR Holdings– Special Drawing Rights (also called “paper gold”) is a reserve created by the IMF to help countries that have BOP problems. The member countries have to contribute to this account in proportion to their IMF quota. The SDR basket consists of five major currencies of the world – the US dollar, Euro, British Pound, Chinese Renminbi and Yen (Japan). 
4. Reserve Tranche-The reserve tranche is a portion of the required quota of currency that each IMF member country must provide to the IMF. It can be accessed by the member country at any time for its own purposes without a service fee. 

Why in News?

• India’s foreign exchange reserves touched an all time high of $555.12 billion after it surged by $3.615 billion in the week ended October 16.

Reference:

1. https://www.thehindu.com/business/Economy/forex-reserves-hit-record-high-of-55512-bn/article32933210.ece