Reserve Bank of India accumulates foreign currency reserves by purchasing from authorized dealers in open market operations. Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates start rising.
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.
How does the Reserve Bank of India modulate the forex market?
- This article explains how forex market operations of the Reserve Bank of India alter domestic liquidity conditions, which are then modulated consistent with the stance of monetary policy. The Reserve Bank’s intervention in the forex market is aimed at containing volatility.
What is the Reserve Bank of India’s policy on exchange rates?
- The Reserve Bank of India’s policy on the exchange rate of the rupee has been to allow it to be determined by market forces. It intervenes only to maintain orderly market conditions by containing excessive volatility in the exchange rate, without reference to any pre-determined level or band.
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.