- Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.
- Foreign exchange reserves assets can comprise banknotes, deposits and government securities of the reserve currency, such as bonds and treasury bills.
- Some countries hold a part of their reserves in gold, and special drawing rights are also considered reserve assets. Often, for convenience, the cash or securities are retained by the central bank of the reserve or other currency and the “holdings” of the foreign country are tagged or otherwise identified as belonging to the other country without them actually leaving the vault of that central bank.
- Normally, interest is not paid on foreign cash reserves, nor on gold holdings, but the central bank usually earns interest on government securities. The central bank may, however, make a profit from a depreciation of the foreign currency or incur a loss on its appreciation.
- Foreign exchange refers to the currency of other countries, whereas foreign reserves refer to a central bank’s holdings in international currencies.
- Foreign reserves enable governments to maintain currency stability; reserves are employed as an instrument of exchange rate and monetary policy, as well as a means of settling foreign debt and liabilities, and as a buffer against unanticipated emergencies and economic shocks.
- It’s crucial to understand the relationship between foreign reserves and the stock market because building up international reserves has recently become the preferred policy of developing economies in order to attain financial stability.
- Financial flows such as direct investment and portfolio investment became more important. Usually financial flows are more dangerous and unstable that enforce the need of higher reserves. More than that, holding reserves, as a result of the increasing of financial flows
- The country’s foreign exchange reserves increased by US dollar 16.663 billion in the week of August 27, reaching a career high of USD 633.558 billion, according to RBI data.
- The gain was mostly attributable to an increase in Special Drawing Rights (SDR) holdings. SDR holdings are part of a country’s foreign exchange reserves. The IMF distributes SDRs to its members in proportion to their current quotas in the Fund
- On August 23, 2021, the International Monetary Fund (IMF) made an SDR 12.57 billion (about USD 17.86 billion at the current exchange rate) grant to India.
- According to weekly data issued by the Reserve Bank of India (RBI) on Friday, the country’s SDR holdings increased by USD 17.866 billion to USD 19.407 billion in the reporting week ending August 27, 2021.
- Foreign currency assets (FCAs), a major component of overall reserves, fell by USD 1.409 billion to USD 571.6 billion in the reporting week.
- If the currency starts to depreciate against the dollar, the central bank can sell its dollar reserves and buy the local currency to stop it.
- Reserves of gold increased by USD 192 million, to USD 37.441 billion and the country’s reserve position with the IMF increased by USD 14 million to USD 5.11 billion in that week.
- This large amount of reserves is beneficial as that it provides the central bank with adequate weapons to combat future currency devaluation.
- Businesses can be certain that the rupee would not fall sharply as a result of the central bank’s reserve building. They believe the RBI’s reserves will be utilized to protect against large currency movements. As a result, these companies are unable to hedge their dollar exposures on their balance sheets.
- It creates a never-ending vicious cycle in which the more reserves the RBI has, the more secure these corporations grow in taking unhedged exposure and therefore avoiding the costs of financial assets, and the more justification the RBI has for hoarding reserves.
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