What is it? 

• 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 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).
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 depleted foreign exchange reserves are likely to drop further, falling to their lowest level in more than two years by end-2022, as the Reserve Bank of India continues to defend the rupee from the mighty dollar’s rise.
• The country’s reserves have fallen by close to $100 billion to $545 billion from a peak of $642 billion a year ago.
• Those reserves are forecast to fall another $23 billion to $523 billion by the end of this year. If realised, that would be the lowest level in more than two years.

Reference:

1. https://www.thehindu.com/business/Economy/india-forex-reserves-set-to-shrink-further-stir-memories-of-2008-crisis/article65946859.ece