Why Foreign Exchange Reserves are Important

Foreign exchange reserve can be defined as deposits of a foreign currency held by the central bank of a country. Here are some of the reasons why it is important for a country to have good amount of foreign exchange reserves –

1. It increases the confidence in the monetary and exchange rate policies of the government.

2. It enhances the capacity of the central bank of the country to intervene in the foreign exchange market and control any adverse movement and stabilize the foreign exchange rates to provide a more favorable economic environment for the progress of the country.

3. During time of any crisis foreign exchange reserves come to the rescue of any country so as to absorb the distress related to such crisis.

4. It also adds to the comfort of market participants that domestic currency is backed by external assets and hence it also helps the equity markets of the country, because due to strong reserves many people from foreign countries are willing to invest in the country having strong foreign exchange reserves.

However holding too much foreign exchange reserves is also not advisable because it involves the opportunity cost of money tied in reserves rather than investing somewhere else which could have earn higher return on the invested amount.

1 comment… add one
  • Yawar Siab

    Very easy language, understandable.
    Written in a very explained manner.

Leave a Comment

Related pages

asset revaluation journal entriesexamples of direct and indirect quotesdisadvantages of delegationadvantages of foreign exchange reservesadvantages and disadvantages of specialisationdistinguish between capital and revenue expenditurebenefits of managerial accountingexample of primary industryadvantages and disadvantages of lifo and fifoimplication of capmwhat is unearned income in accountingwhat is promissory note and bill of exchangelaw of diminising marginal utilityaccounting horizontal analysismerchant banking vs investment bankingadvantages to socialismcapitalism merits and demeritsadvantages and disadvantages of debit cardsfull meaning of fdidifference between tariffs and quotaswhat is skimming pricingwithdrawal slip in bankinternet demeritshow do you prepare a trial balancedefinition of consigneedifference between implicit cost and opportunity costdisadvantages of organizational chartadvantages and disadvantages of oligopoly market structureexamples mixed economyhorizontal and vertical analysis of balance sheetventure capitalist advantagesvaluation of goodwill and sharessystematic & unsystematic riskwhat is endorseenormal goods and inferior goodsbraeburn capital websitewhat is a conglomerate in economicsexamples of substitution effectwhat is privatisation in economicsskimming pricing strategy examplesmonopolistic competition meaningentry for unearned revenuefdi abbreviationunclaimed dividendsdecentralised structureadvantages and disadvantages of stocksprepaid expense meaningwholesale funding vs retail fundinghow to prepare fund flow statement from balance sheetconcept of conservatismpayback method definitionadvantages of trading internationallyprivatization in india wikientry for bad debtsdisadvantages of delegationadvantages of merger and acquisitionwhich of the following is a disadvantage of decentralizationregional rural banks functionsrent paid in advance journal entrytrial balance meaningprestige pricing advantages and disadvantagesvertical analysis financial statementsexamples of unitary demanddisadvantages of a cashless societyadvantages and disadvantages of functional organizationdurable and nondurablehorizontal analysis vs vertical analysisdistinguish between micro and macro economicadvantages and disadvantages of lifo and fifoglobalisation disadvantagesautocratic leadership style pdfentry for prepaid expensewhen is the trial balance preparedadvantages and disadvantages of urban and rural lifediversifiable risk and nondiversifiable riskwhat is duality in accountingautocratic leadership disadvantageslaws of diminishing returnswhat is perpetual succession