India emerges as 5th largest forex reserves holder in the world

Source: PIB

What is the News?

The Minister of State for Finance has informed Lok Sabha about the state of India’s Forex Reserves.

State of India’s Forex Reserves:

• India’s forex reserves currently stand at $608.99 billion as on June 25, 2021.
• India has emerged as the fifth largest foreign exchange reserves holder in the world after China, Japan, Switzerland and Russia.
• Further, India’s foreign exchange reserves position is comfortable in terms of import cover of more than 18 months and provides a cushion against unforeseen external shocks.

Steps taken by RBI: RBI takes regular steps for diversification of forex reserves by:

• Scaling up operations in forex swap and repo markets
• Acquisition of gold and
• Exploring new markets/products

Reasons for Variation in Forex Reserves: Variation in India’s forex reserves is primarily due to:

• RBI’s intervention in the foreign exchange market to smoothen exchange rate volatility
• Valuation changes due to the movement of the US dollar against other international currencies in the reserve basket
• Movement in gold prices
• Interest earnings from the deployment of foreign currency assets and
• The inflow of aid receipts.

Factors on which External Sector Stability Depends: The overall stability of the external sector depends on the following components of the balance of payments:

• Exports and imports of goods and services
• Remittances (transfers)
• Income in the current account,
• The size of net capital flows and
• External debt.

Note: India is comfortable in most of these external sector vulnerability indicators.