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Fall in Forex reserves
Why is it in the news?
- As per the RBI report on foreign exchange management, the adequacy of foreign exchange reserves, as measured by import cover, declined to 10.1 months as on June 2018.
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- India’s foreign exchange reserves declined by $ 24.02 billion to $ 400.525 billion during the April to September period this year.
- The fall has been mainly due to capital outflows and the RBI move to stabilise the weakening rupee through dollar sales.
- The RBI had to intervene in the currency market to slow the pace of fall in the rupee which had depreciated about 15% during the January-October period before bouncing back in November.
- Also, the RBI’s investment in overseas securities declined by $ 23 billion to $ 239.37 billion.
Foreign exchange reserves and Import Cover
Foreign exchange reserves:
- Foreign exchange reserves consist of any foreign currency held by a centralized monetary authority (RBI)
- Foreign exchange reserves are reserve assets held by a central bank in foreign currencies, used to back liabilities on their own issued currency as well as to influence monetary policy.
- India’s foreign exchange reserves comprises of:(i) Foreign currency assets (FCA)(ii) Gold,(iii) Special Drawing Rights (SDRs) and(iv) Reserve tranche position (RTP) in the International Monetary Fund.Import Cover:
- Import cover is a measure of the number of months of imports that can be covered with foreign exchange reserves available with the central bank of the country.
- It is an important indicator of the stability of a currency.
- Eight to ten months of import cover is essential for the stability of a currency.
Source
The Hindu.