India’s Foreign Exchange Reserves: Status, Issues, Policies A Study of Foreign Exchange Reserves in the Indian Context

India’s Foreign Exchange Reserves: Status, Issues, Policies

 A Study of Foreign Exchange Reserves in the Indian Context

Authors:

Meha Mathur,

Muskan Jain,

Nikhil Purohit,

Raghavendra Rathore,

Rohit Chande

Abstract

Foreign exchange reserves are assets held as a reserve by a central bank of a country in foreign currencies. These reserves are used to back liabilities and influence monetary policies. It includes any foreign money held by a central bank, such as the Reserve Bank of India.

Countries use their exchange reserves to stay the worth of their currencies at a hard and fast rate. an honest example is China, which pegs the worth of its currency, the yuan to the dollar. That produces Chinese exports cheaper than American-made goods, increasing sales. Those with a floating rate of exchange system use reserves to stay the worth of their currency below the dollar. They are doing this for the identical reasons as those with fixed-rate systems. Such currency trading takes place within the interchange market. A critical function is to keep up liquidity just in case of a slump. for instance, the present Covid-19 pandemic. That cuts off their supply of foreign currency to purchase imports. therein case, the financial institution can exchange its foreign currency for his or her local currency, allowing them to buy and receive the imports. Similarly, foreign investors will withdraw their deposits from the country's banks, creating a severe shortage in foreign currency. This pushes down the worth of the local currency since fewer people want it. that produces imports costlier, creating inflation. The financial institution supplies foreign currency to stay markets steady. It also buys the local currency to support its value and forestall inflation. This reassures foreign investors, who return to the economy. to supply confidence, the financial organization assures foreign investors that it is able to take action to guard their investments. It will also prevent a sudden flight to safety and loss of capital for the country. in this way, a robust position in foreign currency reserves can prevent economic crises caused when an occurrence triggers a flight to safety. Reserves are always needed to form sure a rustic will meet its external obligations. These include international payment obligations and commitments including sovereign and commercial debts. They also include the financing of imports and the ability to soak up any unexpected capital changes. Some countries use their reserves to fund sectors, like infrastructure. China, as an example, has used a part of its forex reserves for recapitalizing several of its state-owned banks. Most central banks want to spice up returns without compromising safety. They know the most effective way to try this is to diversify their portfolios. They will often hold gold and other safe, interest-bearing investments to do this.

India’s Forex reserves consist of four major categories: Foreign Currency Assets, Gold, Special Drawing Rights and Reserve Tranche Position. India’s Forex position has constantly improved since the 1990s the reasons for this have been discussed in the research paper. Further the current strong position of India’s Forex has also been discussed.

This research paper answers various questions about India’s Foreign Exchange Reserve policies, issues and recommends ways to further fortify the country’s Forex reserves position.