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Consider the following statements about India's foreign exchange reserves :
1. India's foreign exchange reserves are expressed in US dollar terms but are affected by valuation changes of other currencies like the Euro, Pound and Yen.
2. India's foreign exchange reserves are second only to China's.
Which of the above statements is/are correct ?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Consider the following statements about Indias foreign exchange reserv...
Explanation:
Indias foreign exchange reserves are a crucial indicator of the economic health of the country. Let's dissect the statements provided in the question to understand them better.
Statement 1: Indias foreign exchange reserves are expressed in US dollar terms but are affected by valuation changes of other currencies like the Euro, Pound and Yen.
- This statement is correct. Indias foreign exchange reserves are primarily held in US dollars but are also affected by the valuation changes of other major currencies such as the Euro, Pound, and Yen. Fluctuations in the exchange rates of these currencies can impact the overall value of Indias foreign exchange reserves.
Statement 2: Indias foreign exchange reserves are second only to Chinas.
- This statement is incorrect. While India does have significant foreign exchange reserves, they are not the second-largest in the world. As of 2021, China holds the largest foreign exchange reserves globally, followed by Japan and Switzerland. India ranks lower in the list of countries with the highest foreign exchange reserves.
Therefore, the correct answer is option 'A) 1 only', as only statement 1 is accurate while statement 2 is not. It is essential for countries to maintain an adequate level of foreign exchange reserves to manage their external obligations and ensure stability in the economy.
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Consider the following statements about Indias foreign exchange reserv...
Foreign exchange reserve assets include foreign marketable securities, monetary gold, special drawing rights (SDRs) and reserve position in the IMF.
The main purpose of holding foreign exchange reserves is to make international payments and hedge against exchange rate risks. Foreign exchange reserves are maintained as a multi-currency portfolio comprising major currencies such as the US dollar, Euro, Pound sterling, and Japanese yen, among others. Still, they are valued in terms of US dollars. Even though mostly expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves. So, Statement 1 is correct.
Forex reserves are foreign currency assets held by the central banks of countries. China has by far the largest foreign currency reserves, with over two and a half times more than Japan's second-largest reserve holder. As of end-November 2022, India is the world's sixth-largest foreign exchange reserves holder. So, Statement 2 is not correct.
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Consider the following statements about Indias foreign exchange reserves :1. Indias foreign exchange reserves are expressed in US dollar terms but are affected by valuation changes of other currencies like the Euro, Pound and Yen.2. Indias foreign exchange reserves are second only to Chinas.Which of the above statements is/are correct ?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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