foreign exchange resserves

7/27/2019 Foreign Exchange Resserves

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Balance Of Payments (BOP)Most of exports and imports involve finance i.e. receipts and

payments in money.An account of all receipts and payments is termed as Balance ofPayments (BOP).All the transactions entered in the BOP can be grouped in 3groups:

-Trade account balance-Capital account balance-Current account balance-Foreign exchange reserves


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Foreign Exchange ReservesStores of international currency held by the central banks of nations

around the world.

Primary purpose

- The international settlement of debts.

- Payments between governments.

Effects exchange rates, international trade and inflation.

Also called FOREX reserves.


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Some Concepts Relating to FOREXOfficial International Payments:

Use FOREX.Payments associated with military spending, Govt aids and loans.Countries stay committed to build strong FOREX reserves to

- help to balance world economy.-stay good standing with allies.

Gold Standard & U.S Dollar:Once only Gold & Silver are used for settlements.U.S was only one left untouched after the two world wars, so becamethe supreme power to make loans.

So U.S Dollar also pegged in the International Exchange.Presently used mediums for exchange:

-Gold-U.S Dollars.

But still U.S Dollar is more dominant.


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Uses of FOREX reserves1. Exchange Rates:

Central banks trade domestic notes against foreign currency. International central banks create domestic currency and used to

buy foreign exchange. Buying foreign currency by creating money devalues the home

currency against that particular medium. Conversely, foreign central banks strengthen the home currency by

releasing foreign currency back into the marketplace out of thereserves in exchange for the domestic currency, which is then takenout of circulation.

The United States Federal Reserve Bank of New York manages theU.S. foreign exchange reserves on behalf of the U.S. Treasury.


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2.International Trade:Exchange rates affect international trade by influencing the prices ofgoods.Exports sell for low prices overseas when the domestic currency hasbeen devalued.imports become more expensive when the home currency is weak.Central banks manipulate foreign exchange reserves for competitiveadvantages.Export economies add to foreign exchange reserves in order to devalue

the home currency and sell cheap goods overseas.Ex: China leads the world in foreign exchange reserves and carriesover $2 trillion in U.S. dollars, which effectively devalues the Yuan anddrives China's export economy.


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3. Inflation and loss:

Fiat currency, which identifies money that is not backed by gold, is

always susceptible to long-term devaluation, or inflation.

Inflation identifies the loss of purchasing power that occurs over time.

Nations that hold large amounts of foreign currency incur losses in

purchasing power as the exchange values of that currency decrease.

Foreign exchange reserves earn little in terms of interest. The interest income will not overcome the losses realized from

holding depreciating currency.


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BOP Statistics released by RBI on 31-12-12


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ConclusionFOREX reserves play a key role in the Balance of payments. So

every country should improve their reserves by improving their capital

investments and international trade.

foreign exchange resserves

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