‘Forex reserves’ is an important term in economics and its understanding is necessary to understand how an economy functions with respect to international trade and commerce. In this article, we give you a brief about forex reserves for the IAS exam.
Forex reserves or foreign exchange reserves (FX reserves) are assets that are held by a nation’s central bank or monetary authority. It is generally held in reserve currencies usually the US Dollar and to a lesser degree the Euro, Japanese Yen, and Pound Sterling. It is used to back its liabilities – like the native currency issued and also reserves deposited by financial institutions or the government with the central bank.
In a conservative view, forex should only contain foreign banknotes, foreign treasury bills, foreign bank deposits, and long and short-term foreign government securities. But, in practice, it also contains gold reserves, IMF reserve positions, and SDRs, or special drawing rights. The latter figure is more easily available and is officially known as the international reserves.
Forex Reserves India
As of 26th April 2019, India has USD 418.515 billion forex reserves. India ranks eighth in the world in forex reserves. At rank 1 is China followed by Japan and Switzerland.
Purpose of keeping foreign exchange reserves
- To keep the value of their currencies at a fixed rate.
- Countries with a floating exchange rate system use forex reserves to keep the value of their currency lower than the US Dollar.
- To maintain liquidity in case of an economic crisis.
- The central bank (RBI) supplies foreign currency to keep markets steady.
- To ensure that a country meets its foreign obligations and liabilities.
Importance of foreign exchange reserves
According to a report by Goldman Sachs, stronger foreign currency reserves will allow developing market central banks to “buffer their currencies against sharp declines by supplying dollars to the market” at times of volatility.