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  • Category: Government

    What are the advantages of foreign exchange reserves?

    Have a query about foreign exchange? Looking out for details on line? On this page, you can read answers to your questions.

    I heard that sometime back in early 90's, we had only very little foreign exchange reserves and we were not having sufficient forex reserves to even import crude oil. I have even heard that these reserves are to be obtained through exports, remittances, foreign fund flows, etc. Can't we buy Dollars in international markets with our Rupees and use those Dollars for purchasing our imports? What is the importance of foreign exchange reserves?
  • Answers

    3 Answers found.
  • What is foreign exchange?
    The currency of another country is foreign exchange for us. The local currency - Indian Rupee or INR- is the legal tender in India. However when we buy some goods from another country, we have to pay them in their currency or some internationally accepted currency like US Dollar, Euro, etc.

    How we get foreign exchange?
    Foreign exchange comes to our country when we export goods, when Indian citizen working in other countries (NRIs) send money to India, when Indian companies do business and service to or in other countries and get the payments sent to India etc.

    How foreign exchange is kept?
    As foreign exchange is not legal tender inside our country, it is just like a commodity to us. The price fluctuates as per demand and supply. So we hold only the bare minimum need foreign exchange with using bank and RBI and keep the excess and extra as investments or bank accounts in the respective countries or international banks and use it whenever needed.

    How and why only certain currencies are more preferred and get value and acceptability?
    The value and acceptability of a country's currency depends on the country's economic stability and growth, political stability, the quantum of its international business etc.

    Can't we buy Dollars in international markets with our Rupees and use those Dollars for purchasing our imports?
    Indian currency has not yet become a preferred currency for international business. International banking business takes place through the international currency bank accounts we maintain with established banks in the accepted currency countries. Thus, if our country maintains account with a bank in US in dollars, the amount can be used to finance our imports. Our export payments in USD will get credited to that dollar account . Paying rupee and getting dollars in exchange is possible for individuals and in small amounts. For large payments it is the international bank balances that has to be used.
    That is why we need more foreign exchange reserves(or more bank balances in foreign currency in other countries).

    How can we improve our foreign exchange reserves?
    The main way is to improve exports and reduce imports. However our foreign exchange spending is mostly for the oil import. That is why we were finding it hard to maintain good foreign exchange reserves. More capital flow by way of foreign investment can also improve exchange reserves. But then, the repatriation of capital and profit will also affect it. As of now the NRIs and Indian IT sector help us get foreign exchange. But due to many changes in the laws of other countries, that also gets affected. Tourism is another area which gets us foreign exchange.

    It is in this context we should see the "Make in India" campaign. That will make our imports (except probably for oil) less and also improve exports. Voluntary choice of 'Swadeshi' also is a solution to decrease dependence on imported goods and thus foreign exchange spending..

    Foreign exchange reserves help us to finance our imports and also get more value to our currency in foreign exchange markets.

    (Note: Though there are more technicalities involved in foreign exchange, this answer is given in general terms for easy understanding of an ordinary person)

  • Foreign exchange is very valuable to our country or to that extent any country because we can use it for payment of our imports and any beneficial investment outside. A healthy condition of foreign exchange in the country is a good sign for our economy.

    As already enumerated in preceding reply by Venkiteswaran there are various ways in which foreign exchange is obtained but interesting thing to note is that if our imports are high enough with respect to our exports then we will be losing these accumulation of foreign exchange very fast and that is a situation which we should avoid by increasing exports. The remittances by NRI also add to the kitty but that can not be relied much as depending on political situation and relations with developed countries these remittances will be affected.

    Our internal currency that is Rupee is only of use inside the country and for any external purchase whether crude oil or advanced war weapons we have to depend upon foreign exchange so it is vital to have comfortable reserves of foreign exchange.

    Knowledge is power.

  • Foreign exchange reserves in the country will improve the economy. For this the country should avoid imports to maximum possible extent and increase exports to other countries. For some natural resources like crude oil there is no way other than importing. But many of the defense items are being imported due to various reasons. The present government is encouraging private participation in defense and allowing many foreign countries to make investments in India. This is a welcome sign for our country. If we have reserves of foreign exchange that will be used to import essential items. We need not exchange our gold reserves for obtaining foreign exchange. Once the foreign exchange reserves increases your economy will be stable and rupee value will increase.

    always confident

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