FOREX RESERVES

About: 

• Meaning: Foreign-exchange reserves (also called forex reserves or FX reserves) are reserve assets held by a central bank in foreign currencies, used to back liabilities on their own issued currency as well as to influence monetary policy. 
  
  
• Importance of Forex:
  • Reserves are held for maintaining liquidity and allowing time to absorb shocks in situations where access to borrowing is curtailed or are very costly.
    
    
  • It provides confidence that the authorities are committed to the timely discharge of external obligations and to supporting the value of the local currency.
    
    
  • It is an important component of the Balance of Payment and an essential element in the analysis of an economy’s external position.
    
    
  • The aftermath of the global financial crisis has, however, triggered a debate on the costs of building up foreign exchange reserves as a self-insurance mechanism. It needs to be acknowledged that Forex reserves have helped insulate India from the worst.