India’s forex reserves: Meaning, Significance
Recently India’s forex reserves recently crossed the $500-billion mark for the first time in history.
In India, the Reserve Bank of India Act 1934 contains the enabling provisions for the RBI to act as the custodian of foreign reserves, and manage reserves with defined objectives
The foreign exchange reserves include three items; gold, SDRs and foreign currency assets.
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Foreign exchange reserves are the foreign currencies held by a country’s central bank.A strong position in foreign currency reserves can prevent economic crises caused when an event triggers a flight to foreign currency from domestic market. They are called reserved assets in Balance of Payments and are located in capital account.
- The most important reason to have reserve is to manage one’s currencies values. They are usually used for backing the exchange rate and influencing monetary policy.
- Reserves are always needed to make sure a country will meet its external obligations. These include international payment obligations, including sovereign and commercial debts. They also include financing of imports and the ability to absorb any unexpected capital movements.