Central Bank’s Role in Foreign Exchange Risk Management

 

Central Bank’s Role in Foreign Exchange Risk Management- Central Banks are government offices that improve their national currencies in order to sustain a healthy economic environment, scale exports and imports, check inflation, and animate growth within their economies. Central banks have a direct impact on the financial markets and in particular the foreign exchange markets. The Central Bank is responsible for keeping its domestic economic affairs in order while remaining competitive in the global environment.

All the Central Banks around the globe need to take steps toward the stability of their respective economies. Nearly all the central bank’s issue guidelines for Risk Management in the commercial banks which they have to follow. One of the primary functions of a Central Bank is to facilitate lending within its state or region. As such Central Banks provide the necessary capital to various commercial banks. This lending arrangement between the central bank the commercial banks allows for an efficient access of capital for individuals and businesses.

Reserve Bank of India has a set of guidelines for the management of different types of risk faced by commercial banks including foreign exchange risk. These guidelines provide the minimum requirement and procedures to manage risks faced by a commercial bank. It also focuses on establishing the Risk Management Committee & Asset Liability Management committee by banks. Other inclusions are for setting limits for the open positions, measurement & control of risk, independent audit of the risk management process, and role board of directors & management.

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