Indiastockguru Team
The world is taking a look at Indian foreign exchange reserves of $704 billion and how India has the fourth largest forex reserves as of September 2024. Behind China, Japan and Switzerland, India once had forex reserves enough only to cover its import bill of just three weeks. That was in 1991 when our gold reserves of nearly 40 tons were pledged with the Bank of Japan and Bank of England. Currently our gold reserves are around $ 658 billion weighing more than 800 tons.
But why are foreign exchange reserves so important for any country? Like individuals holding bank deposits, these reserves are assets held by the country through its central bank. Foreign exchange reserves mainly consist of foreign currency assets (in the form of dollar, pound and euro currency reserves), gold and special drawing rights (SDRs). Reserves increase and decrease as a consequence of inflows through foreign direct investments, exports and outflows while paying for imports and settling external debt.
Foreign exchange reserves of a country indicate the strength of the economy providing the cushion at time of any kind of global shock. That can be in the form of exchange rate volatility or high oil prices which can disrupt the fiscal and monetary framework of any economy.
Foreign investors investing their funds in India have an eye on the foreign currency reserves. In case of pressure on the rupee value due to higher foreign exchange outflows, the Reserve Bank of India steps in by selling dollars to stabilize the rupee. Central banks take steps to stabilize currency value as depreciation increases inflationary pressures in the economy.
With stable currency, higher foreign direct investment is attracted leading to higher capital formation which means expansion of existing industries, development of infrastructure, investment in new sectors and increase in employment. This in turn will lead to higher GDP, increase in per capita income and higher standard of living. So, our foreign exchange reserves should keep rising. Switzerland has double that of India, Japan nearly one and a half times more and China has more than $ 3 trillion forex reserves. A long way to go for us.
