Impact of Forex Reserve on Indian Economy

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Foreign Exchange Reserves in India includes assets holdings in India in form of cash, SDRs, Gold, Foreign Bank Notes, bonds, FII and Foreign Treasury Bills held in one or more foreign currencies like the US Dollars, the EU’s Euro, the British Pound Sterling and the Japanese Yen. India’s foreign exchange reserves are not only in form of physical currency deposited in Bank Accounts in all over the world by the RBI but its reserves held in other instruments like sovereign bonds, gold and SDRs etc. also comprise of reserves. As country’s revenue is being collected from worldwide trade so every country generally holds its foreign reserve in US dollars. So India has also maintained its reserve in US dollars to ensure liquidity in foreign trade.

Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI) are the largest source of Forex Reserves in India. Exports comes on second position to stabilize the long lasting foreign exchange reserve of the country. The Foreign Reserve bring inflow of cash which result into volatility of the stock market.

Foreign Exchange Reserve are vital for every country worldwide growth, hence it is essential to have a good reserve of foreign currency. The largest holdings of Foreign Reserve will facilitate foreign trade, facilitate to maintain stability of exchange rate of the country and to compete in foreign exchange market. It also attracts foreign investors due to strong economical position of domestic industry of the Country which is backed by external support of foreign currency. The main objective behind holdings Foreign Exchange Reserve is to establish position in global markets by making international payments and to fight against volatility of exchange rates.

Having more Foreign Exchange Reserves increase the buying capacity of the Country and reduce dependency of a Country’s borrowings. However, it is advisable that a country should not have excess Foreign Exchange Currency reserve as money is struck off which would lessen the scope to invest it further to gain more returns or profits.

As on 5th January, 2018 India has 411.11 Billion USD Foreign Reserves as against 377.75 USD as on 22nd September, 2017.

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