FOREIGN EXCHANGE RESERVES

 Foreign Exchange reserves (FER) of Central banks have been receiving much attention in the light of increasing global inflation, supply bottlenecks, depreciation of currencies and declining global output,  trade and investment. Foreign Exchange Reserves are assets held as reserves by the central bank. It consists mainly of foreign currency assets, gold and IMF'S Special Drawing Rights (SDRs).It can also include deposits, bonds, treasury bills and other Government securities.Foreign Exchange Reserves  are  nation's back up funds in case of an emergency like rapid devaluation or depreciation of its currency. Countries' generally use foreign exchange reserves to maintain a  stable rate of value of domestic currency, competitively priced exports, and to provide liquidity in the case of a crisis and dip in confidence for investors.Reserves are also required to pay external debt and to fund sectors of the economy. The main purpose of FER is to keep the  value of their currencies  at a  fixed rate. Since most of economies are following floating exchange rate they use FER to keep value of their currency lower than US $.For instance Central Bank of Japan purchased US treasury bills to keep Japanese Yen,s exchange value lower Similarly US had been complaining about deliberately lowering the value of Chinese Yuan against US dollar.FER enables central banks to protect investments and check flight of capital. Further China has successfully used  it in infrastructure projects. 

Foreign Exchange is earned through country's export of goods and services inflow of foreign investments , remittances, borrowings and other transfers. Our exporters deposit their foreign currency  in banks and exchange them for local currency. Similarly inflow of foreign direct investment and portfolio investment ultimately provide foreign exchange to the central bank. Same is the case with inflow foreign remittances external borrowings and transfers. As per Reserve Bank of India sources of variation in FER are 1.Current account balance comprising of foreign trade and invisibles.2Capital Account net(a to f).a.Foreign investment - i.Foreign Direct Investment ii  Foreign Portfolio investment of which Foreign Institutional investors (FIIs)American Depository Receipts (ADR)/Global Depository Receipts (GDR) are included. b.External commercial borrowings C.Banking capital of which NRI deposits d.Short term trade credit e.External Assistance f. Other items in capital account and 3.valuation change are taken into account to determine FER. As per latest available statistics China ranked first  with $ 3301196 million FER followed by Japan $ 1322193 million, Switzerland $ 1064806 million and India $595954 million. 

Our foreign exchange reserves which was merely $1.12 billion (as on June 30 1991) reached a record high of $ 642 billion in  September 2021. Afterwards there was a decline in our FER position to $ 595 billion as on May 6th 2022 which further dipped into 593 billion as on May 13th.This weekly decline comprised of reduction in foreign currency  assets by $ 1.302 billion to $529.554 billion,while gold reserves slipped by $1.1169 billion to $ 40.570 billion, and SDRs dipped by $165 million to $18.204 billion. RBI sources observed that the drop in FER was due to a fall in the dollar value of assets held as reserves by RBI For instance a portion of  reserves were held in Euoros and the Euro depreciated against the US dollar which caused a drop in the value of FER.Similarly RBI has intervened to slow down and smoothen the depreciation of the rupee against US$.The objective is to allow rupee to find out its natural value without undue volatility or unnecessary panic among investors. RBI  obviously can improve the demand for  the  rupee and check its fall by utilising FER.

Reserve Bank of India observed that our current FER position is equal to ten months projected imports .Central bank sold$ 20 billion reserves in March 2022.Due to geo political conflicts spiralling commodity prices and withdrawal of monetary accommodation emerging economies face risks of capital outflows and higher commodity prices feeding inflation. More over India's current account deficit CAD or the gap between value of exports and imports of goods and services is projected to be a ten year high of 3.3% of GDP in the current financial year.Similarly Indian rupee has depreciated 3.5% against US $ so far in 2022.However it is reported that FDI inflows touched a high level of $ 83.57 billion during 2021-22 compared to $ 81.97 billion in  the previous year.  It may be noted here that India's FDI regime is one of the most liberalized in the world. Computer software and hardware and auto industry were major recipients of FDI inflows. Singapore contributed 27% of FDI inflows followed by the US with 18% and Mauritius16% as top investor countries .Among the recipients states Karnataka topped the list with 38% followed by Maharashtra 26% and Delhi 14%.Unfortunately weakening of the rupee and prevailing global investment conditions led to large outflow of foreign portfolio investments from India.

Unlike the economies  like Srilanka and Pakistan external sector and foreign exchange reserves position is relatively robust in India.However there is pressure of inflation, supply bottlenecks, current account deficit and depreciation of rupee value.To sustain external sector of the economy achieving economic growth and price stability is the answer. For attaining economic growth boost in public and private investment are required.In the prevailing global  economic conditions Public sector should continue to invest in basic infrastructure whereas private sector  in turn in all productive sectors of the economy. Providing adequate infrastructure, maintaining price stability, sustaining exchange rate and balance of payment stability are utmost important in facilitating growth with stability.