Foreign Exchange Reserves

Foreign exchange reserves also commonly denoted as Forex reserves contribute a major part in economy’s performance. Foreign exchange reserves are nothing but a space to hold foreign currencies to support domestic liabilities by central bank. In other words Forex reserves are assets held by central bank generally in form of any other currency other than local currency. Most of the countries prefer using USD as Forex currency and so India is nowhere an exception. Foreign exchange reserves satisfy the need of liquidity, return and safety of any country.

Foreign exchange reserves includes assets such as Foreign bank deposits, Foreign banknotes, Foreign government securities (short and long term) and Foreign treasury bills. Foreign exchange deals with assets and so it falls under capital account in balance of trade. Foreign exchange reserves are used to fulfill debts, imports, to manage bank reserves to support markets in case of volatility and to protect shocks and unexpected movements. These reserves can also be used to feed public sector units, to support domestic investments such as infrastructure etc.,

Foreign exchange reserves contribute to exchange rate fluctuations. Lower the foreign exchange rate higher will be the purchasing power of the country and similarly. Foreign exchange reserves have its role to be played even on Fiscal Deficit. More reserves, more liquidity, more safety and so stands as a good support to economy.

Foreign exchange reserves has reached a highly appreciable hike this year, salute to RBI. This hike has been achieved majorly through flow if investments from overseas investors into India’s debt & equity market in 2015. Almost a jump of $25billion has emanated into India from January 2015. Though overseas investment has been standing as a pioneer other reasons accompanied for the hike is dollar depreciation, RBI’s active move in forward purchase markets.

Foreign exchange reserves has touched a new record of $353.87 billion by 15^th May,2015 from $351.86 billion on 1^st May, 2015. RBI conveys that good macroeconomic environment , Foreign exchange reserves and current growth rate which is above China’s growth rate would act as 3 defensive layers for further volatility, capital flows and economic growth.

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