India's foreign exchange reserves recently crossed $400 billion for the first time in its history in November 2017. Foreign exchange reserves are money or other assets held by a central bank of the respective country or by another monetary authority so that it can pay, if necessary, its liabilities, such as the currency issued by the central bank, as well as the various bank reserves deposited at the central bank by the government and other financial institutions. Reserves are held in one or more reserve currencies, primarily the US dollar and, to a lesser extent, the EU euro, British pound and Japanese yen. Foreign exchange reserves play a crucial role in the balance of payments component and also an essential element in analyzing the external position of an economy. India's level of foreign exchange reserves consists of foreign currency assets (FCA), gold, SDRs and reserve tranche position (RTP) in the IMF. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get Original Essay Countries use their foreign exchange reserves to maintain the value of their currencies at an appropriate rate in times of extreme market volatility and also the main function is to maintain liquidity in the event of an economic crisis. For example, a flood or volcano could temporarily suspend local exporters' ability to produce goods. This cuts off their supply of foreign currency to pay for imports. In that case, the central bank can exchange their foreign currency for local currency, allowing them to pay for and receive imports. The central bank provides foreign currency to keep markets stable. Also buy local currency to support its value and prevent inflation. The Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 establish the legal provisions to govern foreign exchange reserves in India. The Reserve Bank of India accumulates/disperses foreign exchange reserves by buying/selling from authorized dealers in open market operations when required. India's foreign exchange reserves act as a cushion against rupee volatility once global interest rates start rising. In India, the RBI publishes reserve information every Friday. India's foreign exchange reserves peaked at US$411 on January 5, 2018 as per data released by the Reserve Bank of India on January 12, 2018, of which US$387 billion (94.16%) was in the form of foreign exchange assets foreign, $20.5 billion (5%) in gold, $1.5 billion (0.36%) in SDRs and $2 billion (0.48%) in gold reserve tranche (RTP) in the IMF. Gold as a proportion of our reserves is relatively small, with only 5% still in second place. After foreign currency assets in our reserves. Gold is the ultimate currency in India. In fact, only gold came to our rescue during the 1991 crisis. The rise in Forex reserves in India in recent years demonstrates the underlying strength of its balance of payments with the increase in FDI, FII and NRI investments , especially since 2014. Reserves are always necessary to ensure that a country meets its external obligations. These include international payment obligations, including sovereign and commercial debts. If we observe that imports to India in November 2017 amounted to $40 billion, then with the current level of reserves it can easily cover 10 months of imports. Please note: this is just an example. Get a custom paper from our expert writers now. Get a Custom Essay In the world, more than 100 countries maintain Forex reserves and provide data to the IMF on a weekly basis (or).