Question

give one article of how foreign exchange reserves are affected by a country that mainly exports crude oil or another commodity

Answer 1

Foreign exchange reserves are a store of foreign currency assets held by a country’s central bank. The most popular reserve currencies are US dollars, British pounds, euros and Japanese yen.

A reserve's grand total is made up of more than just cash. It could contain treasury bills, government securities, gold or International Monetary Fund (IMF) reserves. Some reserves might also count other liquid assets, as they can quickly be converted into foreign currencies.

They've got two main functions: providing security and influencing exchange rates.

In the first case, they help prove that the central bank has enough money to pay international debts and meet other costs in tricky economic times. This makes it easier to access lending. Countries usually buy commodities like oil in foreign reserve currency as well, as it helps protect them from rate volatility. That's why the IMF recommends central banks hold enough to cover 100% of short-term debt, or the equivalent of three months' worth of imports.

In the second, the central bank buys domestic currency using the foreign reserve. That raises demand, which bumps up the price. It can be a useful tactic to fall back on when a country's currency is falling fast in value.

This all comes down to how they impact on the value of currency. Take a practical example: in June 2015, India actively bought dollars, pushing its reserve to record heights of more than $355bn. It did so because as an exporter, India wants to keep its products competitive in the global market. By purchasing dollars, it kept the price of the rupee – and so its exports – suitably low.

Understanding these kinds of economic motivators is really useful when anticipating changes in exchange rates. If you're planning on making an international money transfer, a foreign exchange broker can handle this part for you. They track trends so they can recommend the best way to send money overseas, whether that means locking in today's price or waiting for a little while. To find the right broker for you, use our intelligent comparison tool.

$400 billion & counting: India puts up a special show- Four years after a currency crisis singed Indian financial assets, the country’s foreign exchange reserves have surged to a record $400 billion, up 45% from the trough, bolstering the hope that there’s enough cushion to face any headwinds originating in global markets.

India now ranks eighth in foreign exchange reserves in a list that’s headed by China ($3.09 trillion) and Japan ($1.2 trillion).

The record amount of reserves accumulated, mainly through the flow of funds from portfolio investors and foreign direct investment in manufacturing as well as services, reflects the strength of India’s macro economy and investor faith in growth.

The current account deficit (CAD) widened to 2.4% of gross domestic product in the June quarter, up from 0.1% in the year-ago period, the central bank said. To be sure, a recovery in global demand helped India’s exports rebound in August after slowing in July, the government said on Friday in a separate data release. But imports outpaced exports and grew 21%, widening the trade deficit to $11.6 billion from $7.7 billion in the year-ago period.

“Record high foreign reserves, mainly borne out of strong portfolio inflows, reinforce investors’ positive view on the economy, beyond the attraction of higher yields and a stable currency,” said Radhika Rao, economist at DBS Bank in Singapore. “With the central bank intervening heavily in the forwards space, the reserves stock is bound to climb further as those swaps mature.” Foreign exchange reserves stood at $400.73 billion for the week ended September 8, RBI said on Friday. Of this, about 6% was contributed by currency movements with the dollar depreciating across a range of currencies.