Question

What are official reserve transactions? Explain their importance in the balance of payments.

Answer 1

Official reserve transactions refer to transactions by the central bank that cause changes in its official, reserves of foreign exchange. Such transactions take place when a country withdraws from its stock of foreign exchange reserves to finance deficit in its overall balance of payments (BOP). A country with surplus in its overall BOP leads to rise in foreign exchange reserves.
Official reserve transactions are very important as they help to bring a balance in the country's overall balance of payments. So, such transactions act as accommodating Item in BOP.