Foreign Exchange Reserves & Its Categories

The stock of liquid assets denominated in foreign currencies held by a government's monetary authorities (typically, the finance ministry or central bank). Reserves enable the monetary authorities to intervene in foreign exchange markets to affect the exchange value of their domestic currency in the market. Reserves are invested in low-risk and liquid assets, often in foreign government securities. 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. The Foreign exchange reserves of India consists of four categories; (i) Foreign Currency Assets, (ii) Gold, (iii) Special Drawing Rights (SDRs) and (iv) Reserve Tranche Position.