What is it? 

• Foreign exchange reserves are foreign currency assets held by the central banks of countries.
• These assets include foreign currency assets, gold, special drawing rights (SDRs) and reserve position in the IMF. 
• The main purpose of holding foreign exchange reserves is to make international payments and hedge against exchange rate risks.
• 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?

• Forex reserves jumped by $9.7 billion to an all-time high of $666.9 billion for the week ended on July 12.
• Foreign currency assets, a major component of the reserves, increased by $8.36 billion to $585.5 billion.
• Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves. 
• Gold reserves increased by $1.23 billion to $58.7 billion during the week.
• The Special Drawing Rights (SDRs) were up by $76 million to $18.11 billion. India’s reserve position with the IMF was up by $32 million to $4.7 billion in the reporting week.

https://www.thehindu.com/business/Economy/forex-reserve-jump-970-billion-to-all-time-high-of-66685-billion/article68425126.ece