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:

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).
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)
SDR Holdings– Special Drawing Rights (also called “paper gold”) is a reserve created by the International Monetary Fund (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).
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.

India’s foreign exchange reserves rose by $1.444 billion to $589.465 billion in the week of May 7.
The increase in foreign kitty in the reporting week was mainly on the back of a rise in the value of gold assets held by the central bank. The gold reserves in the reporting week rose by $1.016 billion to $36.480 billion.
Meanwhile, the central bank’s foreign currency assets (FCA), which constitutes a major component of the overall reserves too increased in the reporting period. FCA rose by $434 million to $546.493 billion.
The FCA reflects appreciation or depreciation of currencies like the euro, pound and yen held in the foreign exchange reserves, expressed in dollar terms. Typically, the value of FCA for a said week is a function of currency depreciation and also the intervention in the currency market by RBI.
The special drawing rights (SDR) fell marginally by $4 million to $1.503 billion.
The reserve position with the IMF too reported a marginal decline of $1 million against the previous week to $4.989 billion.
A strong forex reserves allows the central bank to timely intervene in the currency markets to arrest any slide in rupee devaluations.

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