Saturday, January 31, 2015

Forex

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Foreign-exchange reserves (forex) are assets of a country, generally held by the central bank, and held in foreign currencies. For India, RBI is authorized to maintain Indian forex, which is generally held in US Dollar, or other foreign currencies.

But the question is why do a country hold forex reserve?
There are few reasons behind this. However most important is -

  • Influence Exchange RateIf India has a large amount of forex, then it can target a certain exchange rate. For example, If India wants to increase the value of Indian Rupee (INR), India could sell its dollar reserves to buy INR on the foreign exchange market. The increased demand would appreciate the INR. In a fixed exchange rate, forex reserves can play an important role in trying to keep a target exchange rate.
  • Guarantor for External Debts / Liabilities - If India holds a large amount of forex, then foreign countries, or foreign banks (like, World Bank, ADB, etc) will be much willing to provide long term or short term loans. Because, they will understand that India has the ability to payback the loan. It reflects as credit worthiness.

Indian forex
India has four types of forex assets -
  1. Foreign Currency Assets - This is the most important part of forex, and holds the maximum portion of it. It simply means how much foreign currency (generally dollar) India holds (Jan 23, 2015 - USD 2,97,510)
  2. Gold Reserves - This is the next most important part. How much gold India holds (Jan 23, 2015 - USD 19,377 worth gold)
  3. Special Drawing Rights (SDR) - These are the drawing rights, or a claim to currency, that a country holds with IMF, that can be sold or bought. Note that it can be exchanged with currencies. (Jan 23, 2015 - USD 4,047)
  4. Reserve Position in the IMF - Also known as Reserve Tranche Position (RTP). It also represents a forex, to some extent (Jan 23, 2015 - USD 1,101)

In Jan 23, 2015, India holds total USD 3,22,037 as forex


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