Competitive Exam Explainers | Indian Economy
Why in the story?
India’s foreign exchange jumped $7.26 billion to $674.193 billion in the last week of July 3, the Reserve Bank of India said on Friday. In the last week, the forex currency decreased by $ 5.654 billion to $ 666.933 billion. The kit swelled to $728.494 billion in the week ending February 27 this year before the Middle East war broke out, leading to weeks of lows as the rupiah struggled. RBI they have to intervene in the forex market through dollar trading. Prime Minister Narendra Modi he has also asked people several times since May 11 to the people of the country to save foreign currency by reducing foreign travel, reducing fuel consumption and refraining from buying gold for one year.In this article, let’s understand who are the forex banks, who owns them, and when RBI can step in.
Concept in simple words
Foreign exchange reserves (Forex reserves) are foreign currencies, gold, and other international assets held by the central bank to cover foreign payments and stabilize the domestic currency. Think of them as the country’s emergency fund in foreign currency, which is used to pay for imports, pay off foreign debt, and protect the rupee if it faces problems.A common misconception is that these reserves are “public funds” that do not work. In fact, the RBI builds these reserves by buying foreign currency in the market using newly minted rupees. So even though the reserve is a national asset, it also sits against the rupee’s premium on its RBI balance sheet. This is why the RBI, not the finance ministry, decides how and when the reserves will be used, and why they cannot be sent to the government to issue funds.
How it works
The Indian forex portfolio consists of four components:
- Foreign Currency Assets (FCA): the largest portion, which is mostly held in US Treasury bonds and deposits with foreign central banks. For the last week on July 3, the foreign currency, which is the main part of the reserve, increased $ 4.51 billion to $ 545.578 billion.
- Gold Reserves: Gold reserves rose by $2.6 billion to $105.2 billion during the week.
- Special Drawing Rights (SDRs): the country’s Special Drawing Rights and the International Monetary Fund also increased by $65 million to $18.623 billion. SDRs are international currencies created by the IMF, valued against a basket of five currencies.
- Reserve Trench Position (RTP): India’s position linked to the IMF is the IMF, which can participate without conditions or fees.
The RBI accumulates these resources through the market (buying dollars when there is a surplus), interest on existing deposits, and funds from various institutions. It mainly drags them down to sell dollars when the rupee is depreciating, managing volatility rather than protecting a stable target.
Important institutions are the legal system
- Reserve Bank of India Act, 1934: gives the RBI statutory powers to maintain and manage foreign exchange reserves as part of its monetary and financial operations.
- Foreign Exchange Management Act (FEMA), 1999: replaces the old FERA and manages all foreign, current and accounts of India.
- International Monetary Fund (IMF): manages SDRs and storage units; India is a founding member and adheres to the IMF’s data dissemination standards for reserve reporting.
- Ministry of Finance: not the bank manager, but coordinates the policies of the foreign banks along with the RBI.
Indian news
India has one of the largest reserves in the world, placing it behind China but among the world’s most well-armed, giving them a comfortable cover. Meanwhile, RBI’s revised FCNR-B scheme is expected to attract $40-50 billion in new deposits, with banks expanding their reach to NRI customers. The banking industry has collected $3-4 billion through FCNR-B deposits so far. The scheme, aimed at non-resident Indians, is one of the tools the RBI is using to rebuild reserves after a dip caused by Middle East tensions and pressure on the rupee. Historically, the reserves have been instrumental in past crises, most notably in 1991, when India pledged gold to repay emergency loans, and in 2008, when the reserves resolved the global financial crisis without the need for IMF guidance. Image of FACTBOX
- Latest forex stocks: $674.19 billion (week ending July 3, 2026)
- Always: $728.494 billion (last week February 27, 2026)
- Supervisor: Reserve Bank of India
- Four parts: FCA, Gold, SDR, Reserve Tranche Position
- Rules of Procedure: RBI Act 1934, FEMA 1999
- Main section: Foreign Currency Assets (about 80-85% of total reserves)
Mains information question: “Foreign funds are national assets and central bank debt.” Discuss this statement in relation to the structure and management of India’s forex reserves, and note the limitations of its economic use.
Try it yourself
Q1. Which of the following are among the savings banks in India?
- Foreign Currency Assets
- Gold held by RBI
- Exclusive Copyright
- Economic deficit
Choose the correct answer:(a) 1, 2 and 3 only(b) 1 and 4 only(c) 2 and 3 only(d) 1, 2, 3 and 4Answer: (a)Q2. The Reserve Tranche Position means:(a) Gold coins of India and World Bank(b) Share of India’s IMF share available without conditions(c) Loan taken by India from IMF(d) External debt of India to other countriesAnswer: (b)Q3. Which law governs foreign exchange in India today?(a) FERA, 1973(b) RBI Act, 1934(c) FEMA, 1999(d) Banking Regulation Act, 1949Answer: (c)Q4. The largest share of forex reserves in India by value are:(a) Gold(b) Exclusive Copyright(c) Foreign Currency Assets(d) Trench ReservesAnswer: (c)Q5. RBI uses forex reserves to:(a) Contributing money to the budget of the union directly(b) Intervening in the money market and fixing the rupee(c) Pay the salaries of government employees(d) Administrative expensesAnswer: (b)
Things to know
- Foreign Currency Assets (FCA): dollar, euro, yen and pound-denominated HOLDINGS that make up the reserves.
- Special Drawing Rights (SDR): a reserve asset created by the IMF similar to a basket of currencies.
- Reserve Trench Position (RTP): India’s non-compliance with the IMF.
- FEMA, 1999: an act to regulate foreign exchange transactions in India.
- Imported Cover: the number of months of export that the country’s reserves can finance, a very important indicator.