Why RBI keeps foreign exchange reserves?

In brief, official reserves are held for precautionary and transaction motives keeping in view the aggregate of national interests, to achieve balance between demand for and supply of foreign currencies, for intervention, and to preserve confidence in the country’s ability to carry out external transactions.

Does RBI keep foreign exchange reserves?

The Reserve Bank of India (RBI)’s foreign exchange reserves have been increasing sharply, suggests new data. Since April 2020, the RBI’s dollar reserves have grown by over $100 billion to now stand at $608 billion, making India the fifth-largest reserve holding country in the world.

How does RBI control foreign reserves?

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 happens when foreign reserves increase?

An increase in foreign exchange reserves raises both liquid and total debt, while shortening debt maturity. To the extent that foreign exchange reserve interest rates are low, increased foreign reserves will cause a permanent decline in consumption, as well as move labor from the non-tradable to the tradable sector.

What are the authorities dealt by RBI for foreign exchange?

Ans. An Authorised Dealer (AD) is any person specifically authorized by the Reserve Bank under Section 10(1) of FEMA, 1999, to deal in foreign exchange or foreign securities (the list of ADs is available on www.rbi.org.in) and normally includes banks.

Is forex reserve good or bad?

Portfolio equity investments are known as “hot” money or speculative money and as on March 2021, these flows accounted for 23 per cent of total liabilities. Thus, the forex reserves build-up has the potential risks of growing debt liabilities and facing the vagaries of “hot” money.