Foreign Exchange Reserves
- India’s foreign currency reserves include things like gold reserves, SDRs held with the IMF, and assets the central bank has kept in foreign currencies (in India, the Reserve Bank of India). Foreign treasury bills, foreign bank deposits, foreign government securities, and other items are included in the forex reserves in addition to foreign banknotes. A safety net and a buffer against difficult and stressful circumstances are provided by forex reserves. These are used to support domestic currency-denominated liabilities and have an impact on monetary policy. Among the world currencies that are retained as foreign exchange reserves are the US dollar, the Euro, the British pound sterling, the Japanese yen, and the Chinese yuan.
What Are Reserves of Foreign Exchange?
- The foreign exchange reserves of the central bank are sizeable assets held as reserves in a variety of different currencies.
- They are regularly used to create monetary policy and manage exchange rates.
- Only foreign banknotes, foreign treasury bills, foreign bank deposits, and long- and short-term foreign government securities should be categorised as FX, according to a conservative viewpoint.
- In actuality, consideration is given to IMF reserve positions, SDRs, and gold reserves. The term “international reserves” is more appropriate for the latter figure because it is easier to calculate.
Objectives for Maintaining Foreign Exchange Reserves:
- maintaining and boosting trust in monetary and exchange rate regulatory methods
- gives you permission to act to defend the national or union currency.
- minimises external vulnerability by keeping enough foreign currency liquidity on hand to absorb shocks in times of need or when borrowing is not permitted.
Why it is important to maintain foreign currency reserves:
- The goal of maintaining currency reserves is:
- to preserve their own currencies’ exchange rates.
- Foreign exchange reserves are used to keep the value of a currency below the US dollar in a nation with a flexible exchange rate regime.
- to keep liquidity in the case of a financial collapse.
- The central bank (RBI) issues foreign currency in order to maintain market stability.
- to make certain that a nation fulfils its international commitments and obligations.
Increasing Factors for Foreign Exchange Reserves:
- The primary forces behind the growth of foreign exchange reserves are foreign direct investment and international portfolio investor investments in Indian stocks.
- Reserves quickly increased as a result of the Finance Ministry’s statement that corporation tax rates will be decreased in 2019.
- Because of the decline in crude oil prices, importing oil is now less expensive, saving huge amounts of foreign currency.
- The two main reasons why money is currently exiting the country are remittances and overseas trips.
Foreign exchange reserves are crucial:
- The RBI is able to manage India’s internal and international financial worries, which is advantageous to the government at a time when the GDP is contracting (23.9 percent) and foreign exchange reserves are increasing.
- It aids the government in fulfilling its duties to pay off its debt to foreign countries and to acquire foreign cash.
- Rupee Strengthening: As foreign exchange reserves have grown, the rupee has gotten stronger against the dollar.
