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Using Foreign Exchange Reserves for Development

In: Business and Management

Submitted By raghu7
Words 1926
Pages 8
Foreign Exchange Reserves
• ‘Only' the foreign currency deposits and bonds held by central banks and monetary authorities.

Literal Definition

Generic Definition

• Total of a country's gold holdings and convertible foreign currencies held in its banks, plus special drawing rights (SDR) and exchange reserve balances with the International Monetary Fund (IMF).

Foreign Exchange Reserves
Sovereign Bonds

Foreign Currency Deposits
Gold Deposits

Special Drawing Rights IMF Drawing Rights

Foreign Exchange Reserves

Foreign Exchange Reserves
Outflows
Repatriation of investments and profits
Payment of Loans

Inflows
Bilateral Aids

Loans

Payment of Interest

Investments

Payment for Imports

Payment from Exports

Foreign Exchange Reserves- Change in Treatment

Formerly consisted of only gold and Silver

After Breton Woods Agreement , US dollar also became part of foreign currency

1944-1968 USD was convertible to gold by Federal Reserve System

1968-1973 Only Central Bank could convert reserves to gold

Post 1973 Reserve can’t be converted to gold

Impact of Foreign Exchange
By means of foreign exchange reserve country can control the Exchange rate

To make domestic currency more stable
• Country can purchase domestic bonds using foreign reserves

To reduce the value of domestic currency
• Can purchase foreign notes by that foreign reserves

FOREIGN EXCHANGE RESERVE MANAGEMENT

Foreign Exchange Reserve Management
• To maintain reserves sufficient enough to cover imports for 3 – 4 months ideally, to absorb short-term shocks in the foreign exchange market

Import Cover

Liquidity

• The assets in FER need to be sufficiently liquid for the RBI to be able to easily convert them into cash whenever required

Deployment of FER


Foreign currency assets
 Securities  Deposits

with other central...

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