Background
Despite contraction in the economic growth and the country fighting a pandemic, there is a silver lining in the form of country attaining a milestone of US $ 500 billion in Forex reserves, for the week ended June 5, 2020, sufficient to meet more than 12 months import bill of the country. The story dates back to the crisis days of 1991 when Forex reserves had fallen to paltry US $ 600 million in June 1991, barely enough to finance three weeks import requirements. India was confronting on multiple counts of sovereign ratings downgrade, fiscal budget was not passed, failure to raise external debt, World bank and IMF stopping financial assistance when government was not left with any other option but to pledge gold with Bank of England to seek an economic bailout from IMF, thereby avoiding default on balance of payments. The crisis, in turn, paved way for economic reforms process which was one of the conditions of the lending Institution.
Economic Reforms
The reform process began on 1st July 1991 when RBI devalued rupee by 9%, followed by another devaluation of 11% on 3rd July 1991. Though there was stiff internal opposition to such reforms yet Government went ahead with allowing foreign investments, reduce red tape, and streamline Industrial policy. Government ushered in several reforms in the form of liberalization, privatization, and globalization often referred as LPG. The economic policy reforms have yielded amazing results when GDP of the country grew from a level of US $ 266 billion in 1991 to almost US $ 3000 billion in 2020 and its purchasing power parity rose from US $ 1000 billion in 1991 to US $ 12000 billion in 2020.
Economic reforms led to strengthening of Forex reserves when it kept surging year after year crossing US $ 50 billion in February 2002; US $ 100 billion in December 2003; US $ 200 billion in April 2007; US $ 300 billion in March 2014; US $ 400 billion in September 2017; and US $ 500 billion in June 2020. Post touching a high of US $ 426 billion in April 2018, the reserves fell below US $ 400 billion level to reclaim it in March 2019. The last US $ 100 billion to Forex reserves accrued in little over 15 months period. In terms of Forex reserves ranking, China stands at numero uno position followed by Japan, Switzerland, Russia and India in that order, forming part of elite 500 club.
Composition of Forex Reserves
Other than US dollars, the foreign currency assets include the effect of appreciation or depreciation of non-US dollar currencies namely, euro, pound and yen held in the Forex reserves. Forex reserves could be held in the form of currency notes, deposits, bonds, treasury bills, and other government securities. The gold reserves currently stands at US $ 32.35 billion whereas special drawing rights with IMF is at US $ 1.44 billion.
Forex reserves act as buffer in case of an emergency like rapid devaluation of its currency. Countries use Forex reserves to protect domestic currency from volatility, maintaining liquidity in case of crisis, and provide confidence to investors. The Forex reserves could be used to pay external debts, provide capital to fund sectors of economy, and generate profit from diversified portfolio.
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