India’s foreign exchange reserves recently exceeded those of Russia. The ranking of the other countries has changed little, however. Update on what this means for the international economy and the attractiveness of Forex in 2021.
Understanding the concept of “foreign exchange reserves”
We can first recall what are the foreign exchange reserves. And for that, we have to start with the role of central banks. These are the economic backbone of a country. They manage capital and hold the country’s reserves in the fiat currency used (the euro in France, the pound in the United Kingdom, etc.).
But central banks also serve as reserves for foreign currencies (Foreign Exchange or Forex). We call “foreign exchange reserve” the amounts in foreign currency reserve, that is to say sufficiently stable. There are for example the dollar (USD), the euro (EUR), the yuan (RMB), the Swiss franc (CHF) or the pound sterling (GBP). There are no restrictions on the quantity or nature of currencies held by central banks.
While this is not strictly correct, gold is often included in foreign exchange reserves, given its prominent place in the modern economy. We also find there Special Drawing Rights, which are monetary instruments created by the International Monetary Fund (IMF). These are baskets of currencies used specifically to supplement a country’s Forex reserves: they include the dollar, the euro, the pound sterling, the yen and the yuan.
Why are foreign exchange reserves crucial for the global economy?
If the foreign exchange reserves of different countries are so observed, it is because they are often indicative of the economic health of a country. They serve in fact to “back up”, that is to say to maintain the price of the country’s currencies. The rate of the local currency is indeed guaranteed by the reserves of a country. The higher these are, the stronger the currency is in theory.
For centuries, gold played this role. But things have changed following the various global economic crises. In 1971, US President Richard Nixon renounced the gold standard. Since then, it is the reserves of central banks that back currencies, and no longer just gold. Forex reserves thus allow countries to play on the exchange rate of a currency. Recently, for example, Turkey’s central bank raised its key rate, which caused the Turkish lira (TRY) to soar.
It should be noted that countries with relatively stable exchange rates (the United States and the euro zone for example) have less need for foreign exchange reserves. Conversely, developing countries need more Forex reserves to maintain their economy. This is the case of China, which in February 2021 had more than 3.3 trillion dollars in Forex currencies and which seems to be able to avoid the crisis for the moment.
India’s Forex reserves now exceed Russia’s
This is why the overtaking of Russia by India is notable. According to the Reserve Bank of India (RBI), India’s reserves hit a record $ 590 billion during the month of January. It is therefore a short head ahead of Russia, at $ 580 billion. This shows a new solidity for the Indian economy: the reserves can now cover 18 months of importation. India is now placed 4th in the standings, behind China, Japan and Switzerland.
In Europe, Switzerland first followed by Germany and France
In the case of European countries, it is therefore Switzerland that has the largest Forex reserves – by far. It is $ 1 trillion in foreign exchange, gold and special drawing rights that are held by its central bank. It is followed by Germany (12th place in the general classification), with 266 billion dollars. France is in 14th place with 221 billion dollars. It should be noted that the Banque de France has been more optimistic than for 2020, because it forecasts GDP growth of + 5.5% in 2021 and + 4% in 2022.
The attraction of Forex spreads to individuals
Beyond central banks, the foreign currency market is becoming global. The arrival of large web companies made Forex trading accessible to a population that until then could not bet on foreign currencies.
Proof of this democratization: the total value of the Forex industry has exploded in four years, from $ 1.934 quadrillion in 2016 to 2.4 quadrillion in 2019. $ 6.6 trillion was traded every day on the markets in 2019.
A Forex trading site like IronFX thus attracts individuals with its demo account, zero transaction fees, as well as referral bonuses of up to $ 1,000. The site uses MetaTrader 4, the most widely used platform for Forex traders today.
In 2021, Forex is the largest market in the world in terms of trading volume, liquidity, and value. Its great accessibility (it is open 24 hours a day) allows it to continue to arouse the interest of beginners as well as experienced traders, not forgetting institutions. These are represented by the banks of course, but also the very many brokers. Their weight is considerable and allows to have a real influence on the exchange rate of currencies.
Despite fears of inflation, the currency market is therefore more important than ever. As proof, the strategy of China, which decided at the end of 2020 to consolidate its leadership position, by further increasing its foreign exchange reserves. The ranking of countries should therefore change little between now and the end of the first half of 2021.