‘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 the reserves deposited by financial institutions or the government with the central bank.
In a conservative view, forex should only contain foreign bank notes, 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.
As of 9th November 2018, India has USD 393,011 million forex reserves. India ranks ninth in the world in forex reserves. At rank 1 is China followed by Japan and Switzerland in the third position.
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 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.