Relevance: GS-2: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Key phrases: RBI, FOREX
Why in news?
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Forex reserves dipped by 170 million dollars
Analysis:
What is forex?
- Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities.
- It is used to back its liabilities – like the native currency issued and also reserves deposited by financial institutions or the government with the central bank
Importance of FOREX
- Supporting and maintaining confidence in the policies for monetary and exchange rate management.
- Provides the capacity to intervene in support of the national or union currency.
- Limits external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.
- The rising forex reserves give comfort to the government and the RBI in managing India’s external and internal financial issues.
- Countries with a floating exchange rate system use forex reserves to keep the value of their currency lower than the US Dollar
- Appreciation in Rupee – The rising foreign exchange reserves has helped the rupee to strengthen against the dollar
Current status of FOREX
- As much as 64 per cent of the foreign currency reserves is held in the securities like Treasury bills of foreign countries, mainly the US.
- India also held 653.01 tonnes of gold as of March 2020, with 360.71 tonnes being held overseas
- From facing BOP in 1991 to having a reserve of 630 billion dollars –4th highest in world
How did FOREX reserve decrease?
- Fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange.
- Dollar outflow from overseas remittances and foreign travels have fallen steeply.
- Rise in investment by foreign portfolio investors and increased foreign direct investments-sharp jump with cut in corporate tax
- Conscious policies followed by government
Government policies
- Initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
- Schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme to improve exports
- India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves
Way ahead
- Government wants to utilize the excess forex for developmental purposes but It should be only if RBI and other stakeholders agree
- Export faces problems due to red tape, high turnaround time at ports and this should be tackled at priority
Source: Financial Express