Rajya Sabha TV (RSTV) Discussion: India's Forex Reserves & Economy

By Hemant Kumar|Updated : June 16th, 2020

Rajya Sabha TV Big Picture: India's Forex Reserves & Economy

Context: India's Foreign Reserves crossed the 500 USD mark for the first time after a surge of 8.22 USD in a week ending June 5, 2020 aided by higher foreign inflows.

About Forex Reserves of India:

  • These are holdings of bank deposits, cash,  bonds, and other financial assets which are denominated in currencies other than the Indian rupee.
  • Reserve Bank of India manages the Forex reserves for the Indian government.
  • For long the central Target of keeping reserves has been generally to cover the minimum of 3 months import bills.
  • They facilitate Foreign trade, act as a cushion against the volatility of Rupees and also in case of a slowdown.

Composition of India's Forex Reserve:

  • Foreign Currency Assets
  • Gold
  • Special Drawing Rights (SDRs)
  • Reserve Position in IMF

Reasons for the rise in Forex reserves:

  • Spurt in Investment (FDI)
  • Spurt in investment in foreign portfolio investors in Indian stocks as well as in foreign direct investments (FDIs).
    • Many Indian firms have been acquired by Foreign Investors in recent times. 
    • The rise in Foreign institutional investors (FIIs) in the hope of improving the Indian economy which had earlier pulled huge investment out of the Indian economy in March 2020.
  • Lower oil prices in the past few months because of Oil politics especially between Russia and USA and also global economic slowdown led to a decrease in demand and so the prices. India is heavily dependent on import of oil has benefitted hugely in terms of saving huge foreign reserves.
    • Also because of Nationwide lockdown, the demand for Oil has also reduced so lesser need for imports.
  • Imports bill has gone down substantially in the past few months for the raw materials, intermediary goods in various sectors and also the import of gold has seen a slump.
  • Overseas remittances and foreign travels have also gone down resulting in lesser outgoing of foreign currency from India.

Significance of Higher Forex Reserves:

  • Stability to our financial system in the international market.
  • Greater confidence to all stakeholders on the Indian market.
  • Assist the government in meeting its foreign exchange needs and external debt obligations
  • Insulation from external shocks like high oil prices, trade obstructions etc
  • Reserves are enough to cover the import bills for a year giving more flexibility to Government in taking more risk investment in the strategic arena. 
  • Strengthening of the rupees against the dollar.

What does RBI do with the forex reserves:

  • The RBI acts as the custodian and manages the forex reserves and its operations are within the policy framework that is agreed upon with the government.
  • RBI allocates dollars for specific purposes like under Liberalised Remittances Scheme, a person is allowed to remit up to 250,000 USD every year.
  • It sells Dollars when Indian Rupees gets weakened and buys when Rupees strengthen.


  • Oil prices will go up as the global economy improves and the consensus is built between oil-importing nations.
  • Our exports are uncertain on how it will behave in future as other market emerges from the COVID-19 Pandemic.
  • Inward Remittances will also be going to get further hit and an estimates 25% of reduction from the previous amount.
  • Foreign investment especially FII are very volatile and depends highly on the market status so more focus on the FDI is to be there.

Way Forward:

  • Increase in Capital account liberalisation to allow private companies to invest more in other countries so as to make more beneficial use of Forex reserves.
  • Composition of an expert committee to look after the prospect of utilising the increased Forex reserve in an effective manner.

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