Current Affair 1:

News:

If you see the latest figures:

Also, in the above image see the four types of reserves and their contribution.

Fores reserve management:

The RBI, as the custodian of the country’s foreign exchange reserves, is vested with the responsibility of managing their investment. The legal provisions governing management of foreign exchange reserves are laid down in the RBI Act 1934 which permits the RBI to invest these reserves in the following types of instruments:

• Deposits with Bank for International Settlement and other central banks
• Deposits with foreign commercial banks
• Debt instruments representing sovereign or sovereign guaranteed liability
• Other instruments as approved by the Central Board of the RBI

The basic parameters of the RBI’s policies for foreign exchange reserves management are safety, liquidity and returns.

The RBI has the primary responsibility of collection, compilation and dissemination of data relating to foreign exchange reserves. The data are based on actual balances as per RBI records.

The Reserve Bank’s reserves management function has in recent years grown both in terms of importance and sophistication for two main reasons.

1. First, the share of foreign currency assets in the balance sheet of the Reserve Bank has substantially increased.
2. Second, with the increased volatility in exchange and interest rates in the global market, the task of preserving the value of reserves and obtaining a reasonable return on them has become challenging.

Forex Intervention operations of RBI

Foreign exchange intervention can be defined as a transaction by an official agent of the government, to influence the value of the exchange rate. Put simply, it can be defined as the official purchase or sale of foreign assets against domestic assets in the foreign exchange market.

According to Section 40 of the RBI Act, Reserve Bank can buy or sell foreign currency to any authorized person. In addition to US dollar, RBI has the option to use the Euro as an intervention currency. Generally, intervention is used as a tool for regulating the external value of rupee. However, intervention can also be used as a tool of monetary policy because of its impact on liquidity.

When the central bank buys foreign exchange from the market, it infuses an equivalent amount of rupee funds into the system (injection of liquidity); the opposite happens when it sells foreign exchange in the domestic market.

 

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