UPSC Prelims 2013 Q83: Indian Economy – External Sector & Balance Of Payments
Which one of the following groups of items is included in India’s foreign - exchange reserves?
- (a) Foreign - currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
- (b) Foreign - currency assets, gold holdings of the RBI and SDRs
- (c) Foreign - currency assets, loans from the World Bank and SDRs
- (d) Foreign - currency assets, gold holdings of the RBI and loans from the World Bank
Answer: (b) Foreign - currency assets, gold holdings of the RBI and SDRs
Explanation
India's foreign-exchange reserves
The reserves are held by the RBI and have four parts.
| Component | Detail |
|---|---|
| Foreign Currency Assets | The largest part: US dollars, euros, pounds, yen, held in securities and deposits |
| Gold | Gold held by the RBI |
| Special Drawing Rights (SDRs) | Allotted by the IMF |
| Reserve Tranche Position | India's claim on the IMF |
The options checked:
| Option | Verdict |
|---|---|
| (a) FCA, SDRs and loans from foreign countries | Incorrect; loans are liabilities |
| (b) FCA, gold holdings of the RBI and SDRs | Correct |
| (c) FCA, loans from the World Bank and SDRs | Incorrect |
| (d) FCA, gold and loans from the World Bank | Incorrect |
Rule: loans are money India owes, so they can never be part of reserves.
Answer: (b) Foreign-currency assets, gold holdings of the RBI and SDRs.
Why each option is right or wrong
- (a) Incorrect. Loans from foreign countries are liabilities, not reserves.
- (b) CORRECT. Reserves include foreign currency assets, gold and SDRs.
- (c) Incorrect. Loans from the World Bank are not part of the reserves.
- (d) Incorrect. Loans from the World Bank do not count as reserves.
Key point
Forex reserves: foreign currency assets (largest), gold, SDRs, reserve tranche position in the IMF. Loans are never reserves.
Remember
Forex reserves = FCA + gold + SDRs + IMF tranche.
Common mistakes
- Counting loans from abroad as part of reserves.
- Forgetting the fourth part: the reserve tranche position.
- Thinking gold is the largest component; it is foreign currency assets.
Exam tip
Reserves are what we own, not what we owe. Strike out any option with loans.
Sources
- Reserve Bank of India — Weekly Statistical Supplement: Foreign Exchange Reserves
- Reserve Bank of India — Half Yearly Report on Management of Foreign Exchange Reserves