FOREIGN EXCHANGE RESERVE

November 2017, Paper III
Question
Which of the following does not form part of the foreign exchange reserves of India?
a) Gold
b) SDRs
c) Foreign currency assets
d) Foreign currency and securities held by the banks and corporate bodies
Answer D
Foreign exchange reserves are cash and other reserve assets held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.
Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves. Reserve Bank of India accumulates foreign currency reserves by purchasing from authorized dealers in open market operations. Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates start rising. The Foreign exchange reserves of India consists of below four categories:
1. Foreign Currency Assets 2. Gold 3. Special Drawing Rights (SDRs) 4. Reserve Tranche Position