Forex Reserve:
#GS III #Indian Economy
Topic Indian Economy
Foreign exchange reserves:
- A central bank may hold assets in foreign currencies as reserves, such as bonds, treasury bills, and other government securities.
- It should be emphasised that the majority of foreign exchange reserves are held in US dollars.
Currency reserves in India include:
- foreign currency holdings
- gold reserves.
- With the International Monetary Fund serving as reserves, unique drawing rights (IMF).
Objectives for Maintaining Foreign Exchange Reserves:
- Fostering and maintaining confidence in monetary and exchange rate management strategies.
- Permits taking action to protect the national or union currency.
- Reduces external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is restricted.
The significance of increasing foreign reserves:
- The government and the RBI are in a good position as they manage the nation’s external and domestic financial challenges thanks to rising foreign reserves.
- Crisis management serves as a safety net in the event of a balance-of-payments (BoP) crisis in the economy.
- The rupee has appreciated versus the dollar as a result of increasing reserves.
- Market Confidence: Reserves will provide some reassurance to markets and investors that a government can uphold its international commitments.
