Business News

India’s Forex Reserve is on the Rise – A Reason to Celebrate?

By Ryan Bradman | November 29, 2022

Table of Contents

Introduction

One of the indicators of a healthy economy is the amount held by the country in its forex reserve. A country with a large amount of foreign currencies and assets in its forex reserve helps to protect its economy from crumbling due to high inflations. This is because the Central Bank can easily convert its forex reserve into its indigenous currency to create higher demand for it at the exchange market. The foreign reserve held by a country could be in another strong currency such as the US dollar, pounds, Euro, Japanese yen, or other foreign assets such as Gold, silver, government bonds, SDR, treasury bills, etc.

The Indian forex reserve has been on a steady increase in the past two years after it jumped to a high record of $500 billion for the first time in the history of the country in 2020. The country has continued to maintain this high record, attaining a higher record of $632.7 billion at the beginning of the year 2022.

The rate decreased shortly in February after the Reserve Bank of India (RBI) sold a portion of its reserves to increase liquidity at the exchange market.

Notwithstanding, a great improvement was recorded in November bringing the rate to a new record of $547.25 Billion in the last week of November 2022. Is this enough reason to celebrate knowing fully that the economy is on the right track? How will the Indian Rupee benefit from the present rise in the country’s forex reserve? This work has addressed these pressing questions regarding the Indian economy today.

What is Forex Reserve?

Forex reserve refers to a country’s store of value using foreign assets precious metals like Gold, Silver and government bonds, and other foreign currencies excluding its Indigenous currency. It is like the country’s savings kept by the central bank which they refer back to during times of economic crisis. A country with a large amount of forex reserve helps to preserve the value of its currency from devaluation over time.

While some Forex reserves such as buying government bonds could yield interest for the country over time, other forms such as holding foreign currencies in its reserve do not yield any interest but only helps to stabilize the value of its currency against the effects of inflation.

The most popular foreign reserve currency today is the US dollar. More than 60% of the global forex reserve is denominated in the US dollar. This is followed by the Euro, British pounds and Japanese yen.

What impact does the forex reserve have on the Indian economy?

A rising forex reserve is always an indication of a healthy economy. Countries increase their external reserve only when there are large inflows of foreign exchange in the country. This attracts more investors into the country too. This means we can hope for a boom in the Indian economy over time especially as its forex reserve continues to increase over time.

What effects will the rise on the Indian Forex Reserve have on the Indian Rupee?

An important benefit of the rising forex reserve in India today is that it creates more liquidity for the Indian Rupee. This makes it very easy to exchange the Indian Rupee both at the forex market and while trading with the online trading brokers. This will likely increase the value of the Indian Rupee in the exchange market.

Does the rise in the Indian Forex Reserve call for celebration?

This rise in the Indian Forex Reserve is an indication that the economy is on the right track. This calls for celebration on the part of its citizens for their productivity which has attracted large inflows into the country.