Foreign Exchange Reserves.
DEFINITION of 'Foreign Exchange Reserves'
Foreign exchange reserves are reserve assets held by a central bank in foreign currencies, used to back liabilities on their own issued currency as well as to influence monetary policy.
BREAKING DOWN 'Foreign Exchange Reserves'
Generally speaking, foreign exchange reserves consist of any foreign currency held by a centralized monetary authority, like the U. S. Federal Reserve. Foreign exchange reserves include foreign banknotes, bank deposits, bonds, treasury bills and other government securities. Colloquially, the term can also encompass gold reserves or IMF funds. Foreign reserve assets serve a variety of purposes, but are primarily used to give the central government flexibility and resilience; should one or more currencies crash or become rapidly devalued, the central banking apparatus has holdings in other currencies to help them withstand such markets shocks.
Almost all countries in the world, regardless of the size of their economy, hold significant foreign exchange reserves. More than half of all foreign exchange reserves in the world are held in U. S. dollars, the most traded global currency. The British pound sterling (GBP), the Eurozone's euro (EUR), the Chinese yuan (CNY) and the Japanese yen (JPY) are also common foreign exchange currencies. Many theorists believe that it's best to hold foreign exchange reserves in currencies not immediately connected to one's own, to further distance it from potential shocks; this has, however, become more difficult as currencies have become more interconnected. Currently, China holds the world's largest foreign exchange reserves, with more than 3.5 trillion of assets held in foreign currencies (mostly the dollar).
Foreign exchange reserves are traditionally used to back a nation's domestic currency. Currency – in the form of a coin or a banknote – is itself worthless, merely an IOU from the issuing state with the assurance that the value of the currency will be upheld. Foreign exchange reserves are alternate forms of money to back that assurance. In this respect, security and liquidity are paramount for a useful reserve investment.
However, foreign reserves are now more commonly used as a tool of monetary policy, especially for those countries who wish to pursue a fixed exchange rate. Retaining the option to push reserves from another currency into the market can give a central lending institution the ability to exert some control over exchange rates. It is theoretically possible for a currency to be completely "floating," that is, completely open and subject to exchange rates. In this situation, it would be possible for a nation to hold no foreign exchange reserves. However, this is very rare in practice. Since the breakdown of the Bretton Woods system in 1971, countries have accumulated greater stores of foreign reserves, in part to control exchange rates. (See also: How Foreign Exchange Affects Mergers and Acquisitions Deals ).
Theorists differ as to how much of a nation's assets should be held in foreign reserves, and different nations hold reserves for different reasons. For example, China's vast foreign exchange stores are used to maintain considerable control over exchange rates for the yuan, and thus to promote favorable international trade deals for the Chinese government. But they also hold reserves (mostly in dollars) because it makes international trade, which is done almost exclusively in U. S. dollars, considerably simpler. Other countries, like Saudi Arabia, may hold vast foreign reserves if their economy is largely dependent on a single resource (in their case, oil). Should the price of oil drop rapidly, liquid foreign exchange reserves afford their economy much more flexibility, at least temporarily.
Reserves are considered assets in a capital account, but it is important to remember the liabilities associated with foreign reserves. They are either borrowed, swapped with domestic currency on the international exchange market, or purchased outright with domestic currency - all of which incurs a debt. Exchange reserves are also as risky as any other investment; should a currency collapse, all foreign exchange reserves held in that currency around the world will become worthless.
For many years, gold served as the primary currency reserve for most countries. Gold was long considered the ideal reserve asset, often appreciating in value even during times of financial crisis, and believed to retain an almost-permanent value. However, all assets are only worth as much as buyers are willing to pay for them, and since the breakdown of the Bretton Woods system in 1971, gold has steadily declined in value. (See also: The Bretton Woods System: How it Changed the World ).

Forex reserve of india meaning

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Forex reserve of india meaning

Forex rat Review of forex autopilot Oanda mt4 server How to use dollar index to trade forex Pannelli forex brico Forex secrets tim lucarellis naples We keep talking about our “Forex Reserves” and worry if they fall from $ billion to $ billion, as if some politician just enriched their pockets by taking While the RBI has bought dollars to protect the rupee from gaining value (gaining means lesser rupees to buy dollars) it has not been able to do it the. Objectives of reserve management, statutory provisions, risk management practices, information on transparency and disclosure practices followed by the RBI with regard to reserve management are covered in Part II. Part - I. I.2 Movement of Foreign Exchange Reserves. I Review of Growth of Foreign. Can we say anything about the currency composition of these assets Unfortunately, things become rather fuzzy here due to an acute shortage of data. As with most other central banks, the currency composition of Indias forex reserves is a closely guarded secret. The only available source of information is.
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Foreign Exchange Reserves: Purpose, Ranking by Country.
7 Ways Central Banks Use Foreign Exchange Reserves.
Definition: Foreign exchange reserves are the foreign currencies held by a country's central bank. They are also called foreign currency reserves or foreign reserves. There are seven reasons why banks hold reserves. The most important reason is to manage their currencies' values.
How Foreign Exchange Reserves Work.
The country's exporters deposit foreign currency into their local banks. They transfer the currency to the central bank.
Exporters are paid by their trading partners in U. S. dollars, euros, or other currencies. The exporters exchange them for the local currency. They use it to pay their workers and local suppliers.
The banks prefer to use the cash to buy sovereign debt because it pays a small interest rate. The most popular are Treasury bills. That's because most foreign trade is done in the U. S. dollar. That's because of its status as the world's global currency.
Banks are increasing their holdings of euro-denominated assets, such as high-quality corporate bonds. That continued despite the eurozone crisis. They'll also hold gold and special drawing rights. A third asset is any reserve balances they've deposited with the International Monetary Fund. (Source: "COFER Table," IMF.)
Here are the seven ways central banks use foreign exchange reserves.
First, countries use their foreign exchange reserves to keep the value of their currencies at a fixed rate.
A good example is China, which pegs the value of its currency, the yuan, to the dollar. When China stockpiles dollars, that raises its value when compared to the yuan. That makes Chinese exports cheaper than American-made goods, increasing sales.
Second, those with a floating exchange rate system use reserves to keep their value of their currency lower than the dollar.
They do this for the same reasons as those with fixed rate systems. Even though Japan's currency, the yen, is a floating system, the Central Bank of Japan buys U. S. Treasuries to keep its value lower than the dollar. Like China, this keeps Japan's exports relatively cheaper, boosting trade and economic growth. For more, see How Foreign Exchange Markets Work.
A third, and critical, function is to maintain liquidity in case of an economic crisis. For example, a flood or volcano might temporarily suspend local exporters' ability to produce goods. That cuts off their supply of foreign currency to pay for imports. In that case, the central bank can exchange its foreign currency for their local currency, allowing them to pay for and receive the imports.
Similarly, foreign investors will get spooked if a country has a war, military coup, or other blow to confidence. They withdraw their deposits from the country's banks, creating a severe shortage in foreign currency. This pushes down the value of the local currency since fewer people want it. That makes imports more expensive, creating inflation.
The central bank supplies foreign currency to keep markets steady. It also buys the local currency to support its value and prevent inflation.
This reassures foreign investors, who return to the economy. (Source: "Central Bank Foreign Reserves," M onetary Bulletin, Central Bank of Iceland, 2005.)
A fourth reason is to provide confidence. The central bank assures foreign investors that it's ready to take action to protect their investments. It will also prevent a sudden flight to safety and loss of capital for the country. In that way, a strong position in foreign currency reserves can prevent economic crises caused when an event triggers a flight to safety.
Fifth, reserves are always needed to make sure a country will meet its external obligations. These include international payment obligations, including sovereign and commercial debts. They also include financing of imports and the ability to absorb any unexpected capital movements.
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Sixth, some countries use their reserves to fund sectors, such as infrastructure. China, for instance, has used part of its forex reserves for recapitalizing some of its state-owned banks.
Seventh, most central banks want to boost returns without compromising safety. They know the best way to do that is to diversify their portfolios. That's why they'll often hold gold and other safe, interest-bearing investments. (Source: "Why Do Countries Keep Foreign Exchange Reserves?" The Economic Times, November 22, 2004.)
Guidelines.
How much are enough reserves? At a minimum, countries have enough to pay for three to six months of imports. That prevents food shortages, for example.
Another guideline is to have enough to cover the country's debt payments and current account deficits for the next 12 months. In 2015, Greece was not able to do this. It then used its reserves with the IMF to make a debt payment to the European Central Bank. Find out more about the Greek debt crisis.
By Country.
The countries with the largest trade surpluses are the ones with the greatest foreign reserves. That's because they wind up stockpiling dollars because they export more than they import. They receive dollars in payment.
Here are the countries with reserves more than $100 billion as of December 2016: