News: The RBI reported on October 1, the fall in the forex reserve. It is basically due to falling in the foreign currency assets which is a major component of the overall forex reserves. The report says that the forex reserves slid by 1.169 billion dollars to reach 637.477 billion dollars during the weekend of October 1, 2021.
Understanding the forex reserve: The forex reserve of our country, which is kept with RBI, is comprised of foreign currencies, gold, special drawing rights(SDR), and reserve tranche position kept with IMF. As RBI is responsible to keep the forex reserve, it is called as custodian of the forex reserve.
The value of forex reserve can be termed in dollars or rupees. This forex reserve is very important for any country and could be used in buying the items from the international market, which means a kind of essential for the import. That’s why it is also termed as Import Cover. In this article, the dollar will be termed as for all foreign currencies.
Dynamic of Forex Reserve: When a dollar comes into a country its forex reserve will increase. Similarly, when a dollar moves out of the country its forex reserve will reduce.
The coming of the dollar and outgoing of the dollar can be understood in three ways. First in the form of debit/loan, second in the form of investment, and third in the form of earnings. All the movements of the dollar whether it is coming in a country or moving out of the country is written in Balance of payment. Thus Balance of Payment is a record of all Dollars coming into or moving out of the country. The Balance of Payment comprises two accounts, the current account and capital account. The movement of debt/ loan and investment is recorded in capital account whereas all earnings are recorded in the current account.
In all these account, Whether capital account or current account, coming of dollar as well as moving out of the dollar, both will be recorded. It means all entries will be having two ways. For example, if the Loan/Debt (External Commercial Borrowings/Government Borrowing/Masala Bond) is taken it will be recorded as incoming of the dollar in the capital account, and forex reserve will increase. If the loan is given or repayment of the loan is done then it will be recorded as outgoing of the dollar in capital account, and forex reserve will decrease.
In the same way, if an Investment (FDI/FII/FPI/GDR) is done by foreigners then it will be recorded as an incoming of the dollar in the capital account, and forex will increase. And if the investment is done by residents (citizen/company/bank/government) of the country in any foreign country then it will be recorded as outgoing out the dollar in the capital account.
Similarly, if a country is exporting or receiving remittances (i.e. earning of the country), it will be recorded as incoming of the dollar in the current account. In the same way, if the country is importing or paying remittances (i.e. spending of the country), it will be recorded as outgoing of the dollar.
So we have to understand here that if the dollar is coming in our country, our forex reserve increases. But at the same time, we need to see whether this dollar is a loan, foreign investment or an earning. As discussed above loan and foreign investments will be returned in the capital account and all kinds of earning will be written in the current account. Aur current account for long has Experienced deficit. It is basically our capital account that is in surplus and due to which our forex reserve is touching more than 600 billion dollars.
As on October 1, 2021, RBI reported that it has 637.477 Billion dollar Forex reserve. Out of this 637.477 billion dollars forex reserve, the value of foreign currencies are 575.451Billion dollars, the value of gold is 37.558 Billion dollar, The value of special drawing rights is 19.240 Billion dollars and the value of reserve position in IMF 5.228 Billion dollars. In this way we can say that the forex reserve comprised of 90.27% Foreign currencies ( Dollar Pound Euro Japanese yen and others), 5.89% gold, 3.02% SDR, 0.82% Reserve position kept with IMF.
Understanding Special Drawing Rights(SDR) and Reserve Tranche Position(RTP): Every member country of the International Monetary Fund (IMF) requires to keep a certain amount of forex reserve with IMF as per their quota. One portion of this forex reserve is called Special Drawing Rights and another comes under the Reserve Tranche position.
IMF makes the general SDR allocation to its members in proportion to their existing quotas and it is termed as Special Drawing Rights (SDR). SDR is an alternate reserve currency floated by the IMF, which the member countries can freely exchange between themselves instead of relying on the currency of any one particular country. SDR is a basket of the U.S. dollar, Japanese yen, euro, pound sterling, and Chinese Renminbi.
For example, as of August 23, 2021, the total SDR holdings of India stand at SDR 13.66 billion (equivalent to around USD 19.41 billion at the latest exchange rate. Here you can see 13.6 billion SDR is equal to 19.41 billion USD as per the exchange rate then. Hence one SDR equals 1.42 USD then. Also, we can calculate the value of SDR in terms of rupees. The value of SDR would be changing with the change in the market value of USD or Rupees.
Presently, as of October 1, the SDR of India is equivalent to 19.240 Billion USD as discussed above. This is one portion of India’s quota. Second portion of India quota in terms Reserve tranche position RTP. The RTP is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee. In other words, a portion of a member country’s quota can be withdrawn free of charge at its own discretion. It means India at present can withdraw 19.40 billion USD without interest in case of an emergency.