The Reserve Bank's exchange rate policy focusses on ensuring orderly conditions in the foreign exchange market. For the purpose, it closely monitors the developments in the financial markets at home and abroad. When necessary, it intervenes in the market by buying or selling foreign currencies.
What is the role of Reserve Bank of India in forex?
- In substantive terms, the Reserve Bank functions as the custodian and manager offorex reserves, and operates within the overall policy framework agreed upon with Government of India. Why Hold Forex Reserves? Technically, it is possible to consider three motivesi.e.,transaction, speculative and precautionary motives for holding reserves.
What are forex reserves and how do they work?
- Furthermore, forex reserves are instruments to maintain or manage the exchange rate, while enabling orderly absorption of international money and capital flows.
Are central bank reserves a last resort stock of foreign currency?
- Central bank reserves, however, are characterised primarily as a last resort stock of foreign currency for unpredictable flows, which is consistent with precautionary motive for holding foreign assets.
Why do countries use international reserves for monetary base?
- Few countries explicitly use international reserves as the backing for monetary base and to maintain the stability and integrity of the monetary and financial system.