FEMA

Foreign Exchange Reserve Management

05 Jun, 2019

Provisions Regarding Foreign Exchange Reserve Management?

Provisions Regarding Foreign Exchange Reserve Management IMF (International Monetary Fund) is an international organization whose main purpose is concerned with financial stability and monetary cooperation. This organization issues guidelines for Foreign Exchange Risk Management such as building risk management framework for the risk assessment and maintaining the proper economic environment.

What is Foreign Exchange Reserves?

Foreign Exchanges Reserves are quite important for market stability and good for economies. Foreign Exchange reserves of the Country are mainly the assets in the form of currencies which is usually used in the international transaction. Foreign Exchange Reserves of India are mainly in the form of US government bonds and institutional bonds. Under the foreign exchange reserves, the main element is Foreign Currency Assets”.

In India, foreign exchange reserves are governed by the legal provisions of Reserve Bank of India and Foreign Exchange Management Act.

What is Foreign Exchange Reserve Management?

Under the process of Foreign Exchange Risk management, availability of public sector foreign assets is assured which are controlled by the authorities for the purpose of achieving the objective.

What is the Importance of Foreign Exchange Reserves?

To support monetary policies;
To limit the external vulnerability through maintaining foreign currency liquidity.
To meet the external obligations of the country.
To provide assistance to the government by fulfilling foreign exchange requirements and external debt obligations.
In case of emergency, reserve maintenance.

With the help of Foreign Exchange Reserve Management, it provides support to the country in order to recover from the difficult situation. For the purpose of reserve management, policymakers get informed of market developments by interacting with the reserve managers and financial markets.

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Financial reputation cost may arise in case of risky practices of foreign exchange reserve management. Besides this, inappropriate economic policies may also harm serious risks in order to manage reserves.

What is the Major Objectives of Foreign Exchange Reserve Management?

Foreign Exchange Reserve Management Ensures Following:

Availability of adequate reserves in order the achieve the definite object;
To control the liquidity, and credit risk in the market.
On the funds invested, generation of earnings subject to liquidity and other risk constraints.

Transparency

The responsibility of Foreign Exchange Reserve Management is allocated to the government, reserve management entity and other agency which need to be explained and disclosed publically.

Independent external auditor will conduct the audit of reserve management entity and will give an opinion on financial statements which shall be publically disclosed.

However, the policies of the foreign exchange reserve management cannot substitute macroeconomic management.

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