RBI panel to firm up mechanism for assessing adequacy of forex reserves

News:The Reserve Bank of India (RBI) has formed an internal group to assess whether foreign exchange reserves are adequate to cover various risks.

Facts:

• According to Bimal Jalan Committee report, the RBI’s foreign exchange reserves in 2008 were higher than the country’s external debt.But this position has reversed in 2019.
• At present,India’s foreign exchange reserves (more than $400 billion) are significantly lower than the country’s total external liabilities ($1 trillion) and even lower than total external debt ($500 billion). 
• This position is opposite to that in 2008 when India’s foreign exchange reserves exceeded the then total external debt.
• Therefore,RBI may be required to increase the size of its forex reserves with its accompanying implications for the balance sheet, risks and desired economic capital. 

Additional information:

About foreign exchange reserves:

• Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies.These reserves are used to back liabilities and influence monetary policy.
• These assets serve many purposes but are most significantly held to ensure that a central government agency has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
• The Foreign exchange reserves of India consists of four categories which are (a)Foreign Currency Assets (b)Gold (c)Special Drawing Rights(SDRs) and (d)Reserve Tranche Position.

Reserve tranche:

• A reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund(IMF) that can be withdrawn at any time without any interest during critical situations of a country.

Special drawing rights(SDR):

• The Special drawing rights(SDR) is an international reserve asset created by the IMF in 1969 to supplement its member countries official reserves.The SDR is neither a currency nor a claim on the IMF.
• The SDR basket Includes five currencies namely the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound sterling.