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The assets that a country’s central bank or monetary authority holds to support its liabilities and shape monetary policy are known as foreign exchange reserves. Component-wise percentage distribution of foreign exchange reserves refers to the percentage-wise breakdown of a country’s foreign exchange reserves into its various components, typically held by the central bank. These components often include: Foreign Currency Assets (FCA), Gold Reserves, Special Drawing Rights (SDRs), Reserve Position in the IMF.
In the early 1950s, India’s forex reserves were primarily composed of gold and foreign currency assets, with gold accounting for about 11-13% and foreign currency assets making up the remaining 86-88%. This distribution remained relatively stable throughout the 1950s, with a slight increase in gold reserves by the decade’s end.
The 1960s saw a significant shift, with gold reserves increasing dramatically, peaking at 53.63% in 1964-65. This trend likely reflected India’s cautious approach to international finance and preference for gold as a stable store of value during global economic uncertainty.
The 1970s marked the introduction of Special Drawing Rights (SDRs) into India’s reserve mix. SDRs, an international reserve asset created by the IMF, became a notable component, reaching as high as 24.36% of total reserves in 1972-73. This period also saw a more balanced distribution between gold and foreign currency assets, indicating India’s growing integration into the global financial system.
From the 1980s onwards, there was a clear trend towards increasing the share of foreign currency assets. This shift accelerated in the 1990s, coinciding with India’s economic liberalization. By the turn of the millennium, foreign currency assets dominated the reserves, consistently accounting for over 90% of the total.
The 21st century has seen a continuation of this trend, with foreign currency assets maintaining a dominant position, typically above 88% of total reserves. Gold’s share has fluctuated between 3% and 8%, while SDRs and the reserve tranche position have played minor roles, generally accounting for less than 4% combined.
In recent years, mainly since 2020-21, there has been a slight increase in the gold component, possibly reflecting a hedging strategy against global economic uncertainties. As of 2023-24, foreign currency assets stood at 88.33%, gold at 8.15%, SDRs at 2.8%, and the reserve tranche at 0.72%.
This long-term trend towards foreign currency assets underscores India’s increasing engagement with the global economy, its growing forex earnings from exports and foreign investments, and a strategy to maintain liquidity and flexibility in its reserves. The consistently low levels of SDRs and reserve tranche position suggest that India generally prefers to manage its international financial obligations through its substantial foreign currency holdings.
This data reflects India’s journey from a newly independent nation with a cautious approach to international finance to its current status as a major emerging economy with substantial and diversified forex reserves, playing an increasingly significant role in the global financial system.
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