India's forex reserve surpass Russia's to become fourth biggest

Reserves for both countries have largely stabilized this year after months of rapid growth, while India rose as Russian stocks declined more rapidly in recent weeks.

Indian foreign exchange holdings fell $ 4.3 billion to $ 580.3 billion on March 5, the Reserve Bank of India said on Friday, surpassing Russia's $ 580.1 billion stacks. China has the largest reserves, followed by Japan and Switzerland in the International Monetary Fund (IMF). ) Table.

Analysts say a strong reserve position gives foreign investors and rating firms the confidence that the government can meet its debt obligations despite the deteriorating fiscal outlook and the economy is shrinking annually for the first time in more than four decades.

“India’s various reserves adequacy metrics have improved significantly, particularly in the last few years,” says Kaushik Das, chief India economist at Deutsche Bank, before the latest data were released. “The healthy FX reserves position should give enough comfort to RBI for dealing with any potential external shock-driven capital-stop or outflows in the period ahead.”

The foreign exchange reserves of India consists of four categories :

1. Foreign Currency Assets
2. Gold
3. Special Drawing Rights(SDRs)
4. Reserve Tranche Position

The majority of RBI's foreign exchange reserves consist of gold and foreign currency investments. India's reserves, which are estimated to cover about 18 months of imports, have been strengthened by an exceptional current account surplus, growing inflows in local stock markets, and foreign direct investment (FDI).

What is FOREX Reserve?

Foreign exchange reserves are assets that are held as reserves by a central bank in foreign currency. These reserves are used to support liabilities and influence monetary policy. Includes all foreign currencies held by a central bank such as the U. Federal Reserve Bank. 

Foreign exchange reserves are assets denominated in a foreign currency and held by a central bank. This can include currencies, bonds, treasury bills, and other government bonds. Most foreign exchange reserves are held in US dollars, with China being the world's largest holder of foreign exchange reserves. Economists suggest that it is better to hold foreign exchange reserves in a currency that is not directly linked to the country's own currency. 

Purpose

Foreign currency reserves allow a central bank to buy the national currency, which is seen as a liability to the central bank (since it prints the money or fiat currency as promissory notes). Therefore, the number of currency reserves can change when a central bank introduces the monetary currency. Politics, but these dynamics generally need to be analyzed in the context of the level of capital mobility, the exchange rate regime and other factors known as the impossible trilemma or trinity, i.e. in a world of perfect capital mobility, a country with a fixed exchange rate it could not be independent Conducting Monetary Policy A central bank that opts for a fixed exchange rate policy may be faced with a situation where supply and demand would tend to push the value of the currency up or down (an increase in demand as the currency would tend to increase in value and a decline) and therefore the central bank would have to use reserves to keep its exchange rate steady. 

Flexibility, reserve fluctuation is a temporary measure, as the fixed exchange rate links domestic monetary policy to that of the country of the base currency, so monetary policy must be adjusted in a way that is compatible over the long term, with that of the country in the base currency without the country experiencing capital outflows or inflows, fixed parities have generally been used as a form of monetary policy as they were intended to peg the local currency to a currency of a country with lower inflation to ensure price convergence. With a purely flexible exchange rate regime or a variable exchange rate regime, the central bank does not intervene in the exchange rate dynamics; Therefore, the exchange rate is determined by the market. In theory, no reserves are necessary in this case, other monetary policy instruments are generally used, such as B. 

With interest rates under an inflation target system, Milton Friedman has been a strong advocate of flexible exchange rates because it is more valuable than a fixed exchange rate as independent exchange rates (and in cases of fiscal policy) and the opening of a capital account. He also appreciated the role of the exchange rate as a price. Indeed, he believed that sometimes it might be less painful, and therefore desirable, to adjust a single price (the exchange rate) than the less flexible prices of goods and wages in the economy.

Mixed exchange rate regimes (“dirty floats”, target bands, or similar variations) may require the use of foreign exchange transactions in order to keep the target exchange rate within prescribed limits, such as exchange rate regimes. There is a close connection between exchange rate policy (and thus reserve building) and monetary policy. Foreign exchange transactions can be sterilized (having funds denied by other financial transactions) or non-sterilized.

How Foreign Exchange Reserves Work

Foreign exchange reserves can include banknotes, deposits, bonds, treasury bills, and other government bonds. These assets serve many purposes but are primarily held to ensure that a central government agency has reserve funds if their local currency rapidly depreciates or is converted to a foreign currency. All in all, insolvent.

It is common in countries around the world for their central bank to hold a significant portion of the reserves in their foreign currency. Most of these reserves are held in US dollars as this is the most widely traded currency in the United States.

It is not uncommon for foreign exchange reserves to be made up of the British pound (GBP), the euro (EUR), the Chinese yuan (CNY) or the Japanese yen (JPY). It is best to keep foreign exchange reserves in a currency that is not directly linked to the local currency in order to create a barrier in the event of a market shock. However, this practice has become more difficult as currencies become more intertwined and world trade has become easier.