What is 'Foreign Exchange Reserves'?

About Foreign Exchange Reserves:

• What is it? Foreign Exchange Reserves (also called Forex Reserves) are reserve assets held by a central bank in foreign currencies.
• These may include foreign currencies, bonds, treasury bills, and other government securities.
• Reserves are denominated and expressed in the US dollar, which is the international numeraire for the purpose.
• RBI is the custodian of the Foreign exchange reserves in India.
• India’s foreign exchange reserves comprise of;
  • Foreign currency assets (FCAs): These are maintained in currencies like the US dollar, euro, pound sterling, Australian dollar and Japanese yen.
  • Gold
  • SDR (Special Drawing Rights): This is the reserve currency with IMF.
  • RTP (Reserve Tranche Position): This is the reserve capital with IMF.
• The biggest contributor to India’s Forex reserves is foreign currency assets, followed by gold.
• Purpose:
  • They are used to back liabilities on their own issued currency, support the exchange rate and set monetary policy.
  • To ensure that RBI has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
  • If the value of the Rupee decreases due to an increase in the demand of the foreign currency, then RBI sells the dollar in the Indian money market so that depreciation of the Indian currency can be checked.
  • A country with a good stock of forex has a good image at the international level because the trading countries can be sure about their payments.
  • A good forex reserve helps in attracting foreign trade and earns a good reputation with trading partners.