Foreign Exchange Reserve

Foreign Exchange Reserve, denotes the deposits of a foreign exchange currency held by a Central bank; this practice became popular after the decline of the Gold standard (imposed by the British rule).

Components like foreign investment flows, external commercial borrowings, NRI deposits and change in valuation have been the major contributors to Foreign Exchange reserves in India

• The Peoples Republic of China is #1 in terms of FER at 2,648 Billion USD
• It is followed by Japan ($1041 B), Eurozone ($753B), Russia ($482B), Republic of China i.e Taiwan ($383B), Saudi Arabia ($410B)
• India has a FER of $299B

Main purpose of having a Foreign Exchange Reserve:

• International settlement of debts
• Payments between debts

Possible disadvantages:

• Nations holding large amounts of foreign currency incur losses in purchasing power if the exchange value of that currency decreases
• Resultantly, holding depreciating currency in the Reserve will do no good as income through the interest is very meagre

How to increase Reserves? Through increased "export" of food grains, industrial goods, etc..

Implications of increasing Reserves:

• Exports are higher than imports, so the country need not get more money (taxes) from people for import of goods
• Subsequently, taxes will become less (people will of course be happy, an indirect advantage)
• This will also attract more foreign companies and investors, leading to job growth