Context: Recently, Forex reserves jumped $2.816 billion to $606.859 billion.
About forex reserves
Foreign Exchange Reserves refer to assets kept in reserve by a central bank, comprising foreign currencies such as bonds, treasury bills, and government securities.
These reserves, expressed in the US dollar, the international standard, are managed by the RBI, serving as the custodian of India's Foreign Exchange Reserves.
It includes:
Foreign Currency Assets (FCA)
Gold reserves,
Special Drawing Rights (SDRs)
Reserve position with the International Monetary Fund (IMF)
Significance
They are utilized to support liabilities denominated in their own issued currency, maintain the exchange rate, and formulate monetary policy.
They act as a safeguard in case of an economic Balance of Payment (BoP) crisis. The purpose is to ensure that the RBI has reserve funds in case the national currency experiences a rapid devaluation or faces insolvency.
If the Rupee depreciates due to increased demand for foreign currency, the RBI intervenes by selling dollars in the Indian money market to curb the depreciation.
Reserves instill confidence in markets and investors regarding a country's ability to meet external obligations.
A robust forex reserve is instrumental in attracting foreign trade and building a positive reputation with trading partners.