Foreign exchange reserve refers to the foreign currency that a country has. It is required to make international payments. It mainly includes dollars, gold, special drawing rights (SDR), and deposits in the international Monetary Fund (IMF). Foreign exchange reserves can be used to keep the country's currency stable in times of economic crisis.
Demand and supply of rupee
The demand and supply of rupee depends on many factors. The demand for rupee is mainly made by foreign investors, while indian people demand dollar for imports. indian exports increase the supply of rupee, while imports and foreign investment outflows increase the demand for rupee.
Causes of exchange rate fluctuations
Exchange rate fluctuations are affected by many factors:
oil prices: india imports about 80% of crude oil. When oil prices rise, india needs more dollars, which reduces the demand for rupee and the exchange rate falls.
Interest rates: When the US Federal Reserve raises interest rates, global investors start withdrawing their capital from india and investing in the US. This also weakens the value of the rupee.
Trade deficit: When imports exceed exports, it creates a trade deficit, which puts pressure on the rupee.
Benefits of flexible exchange rate policy
Under the flexible exchange rate policy, the currency rate fluctuates based on market demand and supply. This reveals the true value of the currency and maintains transparency in the market. This policy helps in maintaining economic stability.
click and follow Indiaherald WhatsApp channel