Friday, May 15, 2015

FOREX Reserve's of india and its impact on economy

India's foreign exchange reserves have increased to a record high in the week ended 24 April, as the central bank
looks to fortify the economy against possible troubles related to the weakness in the rupee and current account
deficit. The Reserve Bank of India (RBI) said the country's foreign exchange reserves rose $1.4bn (£917m, €1.2bn) to reach $344.6bn, a new record for the Asian nation, which is expected to grow at the fastest pace among developing
nations in 2015. The RBI has added about $25bn to its forex reserves since
January, as overseas investors poured in large amounts of money in Indian debt and equities market in line with the
country's expected high growth.
India's foreign currency assets, the prime component of forex reserves, now stand at $320bn, having increased by $1.4bn in the reporting week, according to the central bank. Other reserves comprise of gold, special drawing rights (SDRs) and reserve tranche position in the International Monetary Fund (IMF).
While gold reserves and the reserve tranche position in the IMF remained unchanged in the reporting period at
$19.03bn and $1.29bn, respectively, SDRs increased by $0.2m to $4bn.
Finance Minister Arun Jaitley earlier said India's forex reserves are helping the country to check the weakness in the rupee against the US dollar. "India's forex reserves and laws to avert flight of currency have supported the rupee," he said. Credit rating agency Moody's earlier upgraded outlook for India to positive from stable, but it retained the credit rating at Baa3.
India targets an economic growth rate of 8.5% for fiscal year 2015-16, compared to 7.2% in fiscal year 2014-15. The World Bank forecast a growth rate of 7.9% for the economy.

Foreign exchange market – Also known as “Forex” or “FX”. It is a market to trade currencies Indian foreign exchange rate system – India FX rate system was on the fixed rate model till the 90s, when it was switched to floating rate model. Fixed FX rate is the rate fixed by the central bank against major world currencies like US dollar, Euro, GBP, etc. Like 1USD = Rs. 40. Floating FX rate is the rate determined by market forces based on demand and supply of a currency. If supply exceeds
demand of a currency its value decreases, as is happening in the case of the US dollar against the rupee, since there is huge inflow of foreign capital
into India in US dollar Why is the US dollar walking down? – When it comes to the US being a consumer, it has one of the
largest appetites in the world. To keep up its demand for consumption, its imports are huge when compared to exports. This created pressure since there were more payments in dollars than receipt of
any other currency, which made the supply of the dollar greater for imports payment and less receipt of foreign currency from exports. This resulted in
the depreciation of the dollar’s value, which again caused more outflow of dollar for import payments. This created a state of inflation and made consumables costlier to US. To control inflation US
resorted to increase in interest rates to cool down pressure on demand side of consumption. This factor along with recession in all other sectors, particularly real estate, is causing the mighty US
dollar to shake. Impact of dollar fluctuations on the Indian economy Until the 70s and 80s India aimed at to be self-
reliant by concentrating more on imports and allowing very little exports to cover import costs. However, this could not last...