Forex Reserves and Their Benefits

The country’s foreign agents stake the foreign currency in their native banks. They relinquish the currency to the central bank. Forex Reserves are the cash currencies and the other assets such as those which the Central Bank of that country holds. The foreign bank reserves of the country move from one city to another as per convenience. According to the RBI data taken from the date December 4, 2015, the stored forex reserves in India were approximately equal to USD 352 billion (INR 23,415 billion), which included USD 329 billion in foreign currency assets, USD 17 billion of gold, USD 4 billion of SDRs and USD 1.2 billion conserved positions with IMF(International Monetary Fund).

Conventionally, no interest is paid on cash on foreign cash reserves or gold holdings, but we may find that central banks earn interest on government securities. Foreign exchange reserves are also called reserve assets under the category of Functional categories of forex reserves. There is no peer for reserve assets in the responsibilities of the International Investment Position. Forex Reserves assets allow a central bank to purchase the domestic currency, which is considered a responsibility of the central bank. Hence, with a central bank implementing a financial policy, the number of forex reserves changes. Central banks who choose to keep the foreign exchange rate policy fixed may experience a time where demand and supply may push the value higher or lower. Therefore, the central banks would use a foreign reserve to maintain the fixed exchange rates.

For nationals and authorised people, forex reserves are the only foreign currency depository for nationals and authorised people. Most of its usages include the gold reserves, special drawing rights, International Monetary Fund (IMF), etc. It is more officially called official or international reserves, and it is more readily available and more meaningful.

For central banks, the foreign currency deposits are the financial assets and official authorities held in different currencies in different countries. Currently, there are 195 countries which are having foreign exchange reserves, and they have kept their exchange rates constant to gain more benefits. China, Japan, Switzerland, Russia, and India are the 5 top countries having foreign exchange reserves. They are found based on the IMF Data.

The Purpose of Keeping The Foreign Reserves: 

There are seven ways available for a country’s central banks to use the foreign reserves. They are as follows:

1. The countries should use foreign reserves to keep their currency at a fixed rate.
2. The countries with the floating exchange rate system utilise the reserves to keep their currency rate fixed.
3. The third and the most important purpose of the foreign exchange reserves is to maintain liquidity during a crisis. A crisis like floods, volcanos, etc., delays the local exporters’ ability to produce goods. That cuts off their bestow of foreign currency to pay for the imports. In this case, the central banks exchange their foreign reserves for paying for exports and imports by converting them into their local currency. Thus, it is beneficial to maintain high reserves.
   Foreign ministers will be alarmed if a country has a war. They withdraw their deposits from the country’s central banks, creating acute storage in the foreign currencies.
4. A fourth reason is to dispense confidence. The central bank ensures that foreign investors are ready to perform the activity to secure their investment.
5. Fifth, reserves are always needed to ensure a country will accomplish its external commitments.
6. Sixth, some countries utilise their foreign reserves in the fund sectors, such as infrastructure.
7.  Seventh, almost every central bank wants to boost the returns without conceding safety. The best way to do this is by diversifying the portfolios.

Benefits of High Forex Reserves:

1. The store of value, the medium of exchange and general acceptability are the three crucial characteristics for anything to be qualified as money in the High Forex Reserves.
2. The expanding market and the growing technology indicate the growth in reserving foreign reserves.
3. From the reports from the world bank, it is seen that there is an ease in doing business by using the foreign reserves.
4. The foreign reserves are very beneficial in managing the public finances.
5. The continuous increasing liberalisation of the payment and exchange policies in the country has made the market more flexible.

Conclusion

It is concluded that maintaining high reserves is very beneficial for any country. The foreign reserves are used to keep their currencies at a fixed rate. It can be used to maintain the rates and help in crises. The investment in foreign reserves will lead to that country’s economic growth. It will also minimise the efforts in doing the business. Such implemented scenarios guarantee the rise of a country’s global economy.