In this article I am going to discuss about the importance of foreign reserves. In this article we can see the importance and impact of the presence of foreign reserve because of which a country like India had its transition from developing to developed country.



Foreign Exchange reserves are very important for any country as they can of use in the time of paying any foreign debts. Foreign Exchange plays a great role in the process of import and export. Without foreign exchange, a country would not be able to import materials or goods for its development and there is also a loss of international confidence in such a country. In 1991, India was forced to devalue the rupee as our foreign exchange reserves were, at 532 million very low, barely enough for few weeks imports. The crisis was averted at that time by an

IMF loan, the pledging of gold, and the devaluation of the rupee. Several North American banks

had to write off large loans advanced to South American countries when these countries were

unable to make repayments. Certain African countries too have very low foreign exchange reserves. Companies exporting to such countries have to be careful as the importing companies may not be able to pay for their purchases because the country does not have adequate foreign exchange. I know of an Indian company which had exported machines to an African company a few years ago. The importing company paid the money to its bank. It lies there still. The payment could not be sent to India as the central bank refused the foreign exchange to make the payment.

Following the liberalization moves initiated by the Narasimha Rao Government and endorsed/supported by successive governments, India had by 31 December 1999 foreign investments in excess of $28 billion. In May 2000, the foreign exchange reserves had swelled to

over $38.4 billion - a far cry from the $500 million of reserves in 1991. In 2003, the reserves are in

excess of $100 billion. The problem the Reserve Bank of India now faces is managing the huge reserves. In order to discourage short term flows, the Reserve Bank has lowered interest rates and even mandated that the interest paid should not exceed 25 basis points over LIBOR on foreign currency funds and Non- resident deposits.

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