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India's foreign exchange reserves increased by $3.293 billion to $696.610 billion in the week ended 26th December, according to data released by the Reserve Bank of India (RBI) on Friday.
In the previous week, the country's forex reserves had increased by $4.368 billion, RBI data showed.
During the week ended 26th December, the value of foreign currency assets (FCAs), the largest component of the reserves, rose by $184 million to $559.612 billion.
Gold reserves recorded a sharp increase of $2.956 billion to $113.320 billion, largely driven by a rise in international gold prices during the period.
Meanwhile, the value of Special Drawing Rights (SDRs) increased by $60 million to $18.803 billion, while the reserve position with the International Monetary Fund (IMF) rose by $93 million to $4.875 billion.
Foreign exchange reserves are a key indicator of a country's economic health and play a crucial role in maintaining exchange rate stability.
The rise in reserves also reflects the RBI's efforts to manage liquidity and ensure stability in the foreign exchange market. The central bank has said it closely monitors market developments and intervenes when necessary to maintain orderly conditions.
Such interventions are aimed at curbing excessive volatility in the rupee and are not linked to any fixed exchange rate target.
The latest increase in reserves was further supported by the RBI's USD/INR buy-sell swap auction worth $5 billion, conducted on 16th December to inject liquidity into the banking system.
Under the swap arrangement, banks sold US dollars to the central bank in exchange for rupees and agreed to buy back the same amount of dollars at the end of the swap period. The transaction was settled on 18th December, contributing to the overall reserve position.
The steady rise in foreign exchange reserves comes amid strong capital inflows, with India witnessing a notable increase in foreign direct investment commitments during the current financial year.
The RBI is the custodian of the foreign exchange reserves in India. In 2020, India's forex reserves crossed the $500 billion mark for the first time in history due to higher foreign direct investment and foreign institutional investment. Low oil prices also helped reduce outflows, giving India an adequate cushion to combat external shocks.
The biggest contributor to this reserve is foreign currency assets followed by gold, SDRs, and reserves with the International Monetary Fund.
Foreign exchange reserves serve several purposes, including ensuring that the RBI has backup funds if the national currency rapidly devalues or becomes altogether insolvent. If the value of the rupee decreases due to an increase in demand for foreign currency, the RBI sells dollars in the Indian money market to check depreciation of the Indian currency.
A country with a good stock of forex has a good image at the international level because trading countries can be assured about their payments. A good forex reserve helps in attracting foreign trade and earns a good reputation among trading partners.
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