Why in news?

Recently, The share of gold in India's foreign exchange reserves has risen by more than one percent since the pandemic, a trend in line with other central banks, data showed.

More on news:

• Central banks across the globe have been buying gold amid global uncertainty and rising inflation.
• According to the Reserve Bank of India’s (RBI) data, gold reserves stood at 7.36 percent of the total reserves as of August 18, 2023, compared to 6.08 percent as of January 3, 2020.
• Gold is considered a secured and liquid asset, as it safeguards its returns amid global uncertainty and a rising inflation scenario. Both have been prevailing at this point due to uncertainty arising from the Ukraine-Russia war as well as global central banks fighting inflation.
• Since last year, most central banks across the world have started increasing their gold reserves as they turn towards safe haven assets and due to the increase in prices of the metal, which made it attractive.

About Forex Reserve:

• Foreign exchange reserves, also called Forex reserves, are, in a strict sense, only foreign-currency deposits held by nationals and monetary authorities.
• it also includes gold reserves, special drawing rights (SDRs) and IMF reserve position because this total figure, which is usually more accurately termed as official reserves or international reserves or official international reserves, is more readily available and also arguably more meaningful.
• These foreign-currency deposits are the financial assets of the central banks and monetary authorities that are held in different reserve currencies (e.g. the U.S. Dollar, the Euro, the Japanese Yen, the Pound Sterling, and the Chinese Yuan) and which are used to back its liabilities (e.g. the local currency issued and the various bank reserves deposited with the Central bank by the government or financial institutions).
• Before the end of the gold standard, gold was the preferred reserve curruency.
• Some nations are converting foreign-exchange reserves into sovereign wealth funds, which can rival foreign-exchange reserves in size.

Components of Forex Reserves

• The components of Indian forex reserves are vital to the nation's financial stability and economic growth.
• These components are carefully managed to ensure a balanced portfolio responding to various economic scenarios.
• The main elements of forex reserves in India include foreign currencies, gold reserves, special drawing rights, and the reserve portion in IMF.

Foreign Currencies

• The foreign currencies reserve is the most significant component of the Indian forex reserves. It includes major currencies like the US Dollar, the Euro, and the British Pound. Holding these currencies provides liquidity and enables the country to pay for international trade transactions.
• Major Currencies Held: USD, EUR, GBP
• Purpose: Facilitate international trade, provide liquidity
• Impact on Indian Forex Reserves: Enhances stability and confidence
• Foreign currencies play a crucial role in maintaining the value of the local currency and ensuring that the country can meet its foreign obligations.

Gold

• Gold reserves are another essential component of Indian forex reserves. Gold is a hedge against inflation and provides a safety net during economic uncertainties.
• Amount of Gold Held: $44,680 million, as of August 4, 2023
• Purpose: Hedge against inflation and safety during economic downturns
• Impact on Indian Forex Reserves: Adds value and security
• Including gold in the reserves adds an extra layer of protection and value, reflecting the traditional importance of gold in the Indian economy.

Special Drawing Rights

• Special Drawing Rights (SDRs) are international reserve assets the IMF has created. They supplement the foreign exchange reserves of the member countries.
• Amount of SDRs: $18,274 million, as of August 4, 2023
• Purpose: Supplement foreign exchange reserves
• Impact on Indian Forex Reserves: Enhances international liquidity
• SDRs provide additional liquidity and are part of the global effort to stabilise the international monetary system.

 

Reserve Portion in IMF

• The reserve portion in the IMF represents India's quota in the International Monetary Fund. It reflects India's position and voting power within this global financial institution.
• Amount of Reserve Portion: $5,099 million, as of August 4, 2023
• Purpose: Reflects India's position in the IMF
• Impact on Indian Forex Reserves: Strengthens international standing

Current Status of the Indian Forex Reserves

• As of August 4, 2023, the Indian forex reserves latest data estimates it at $601.453 billion. Notably, on July 14, 2023, the Indian forex reserves stood at an impressive $609.02 billion, marking a 15-month high.
• The Indian forex reserves consist of foreign currency assets, gold, special drawing rights, and the International Monetary Fund (IMF) reserve position.
• As per the latest data from the RBI, here are the exact amount of Indian forex reserves held by different components:

Component - Amount (in million USD)

1. Total Reserves                          6,01,453
2. Foreign Currency Assets          5,33,400
3. Gold Reserves                          44,680
4. Special Drawing Rights (SDR)  18,274
5. Reserve Position in IMF             5,099

 

Source: https://www.moneycontrol.com/news/business/share-of-gold-in-forex-reserves-rises-in-line-with-global-trend-11231251.html