Importance of FOREX reserves for a country:

The central bank or monetary authority of a country has forex reserves or foreign exchange reserves (FX reserves). It is frequently held in reserve currencies such as the US Dollar, Euro, Japanese Yen, and Pound Sterling to a lesser extent. It is used to support the company’s liabilities, such as the native currency. It is used to back its liabilities, such as the native currency issued and reserves placed with the central bank by financial institutions or the government.

Importance:

  • The government is in a favourable position due to rising currency reserves and the RBI’s capacity to manage India’s foreign and domestic financial issues at a time when the economy is falling (23.9 percent).
  • It assists the government in meeting both its foreign exchange and external debt obligations.
  • Rupee Strengthening – The rupee has strengthened versus the dollar as foreign exchange reserves have increased.
  • Crisis Management: A growing Forex Reserve acts as a safety net in the case of an economic Balance of Payments crisis. It is sufficient to cover the country’s import expense for a year. On the linked page, you may learn more about the Payment Balance.
  • Market Confidence: Forex Reserves will give markets and investors confidence that a government will be able to satisfy its external obligations.

Written by,

Mansi Sharma