Forex Reserve

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.

Source The  Hindu