The Reserve Bank of India, is the custodian of the country's foreign exchange reserves and is vested with the responsibility of managing their investment. The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934.
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 the foreign exchange reserves of a country?
- In simplest terms foreign exchange reserves are the foreign currencies which are held by the central bank to support liabilities on the issued currency and also a way to influence the monetary policies of the country. It includes government securities, bonds, bank notes, bank deposits and treasury bills.
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.
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.
The correct answer is Reserve Bank of India. In India, the Reserve Bank of India Act 1934 contains the enabling provisions for the Reserve Bank to act as the custodian of foreign reserves, and manage reserves with defined objectives.