How does appreciating dollar or depreciating rupee affect India's foreign exchange reserves?
A related question - which currency is used to calculate India's foreign exchange? is it rupee? is it dollar, or is there some other way?
Thanks
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To my knowledge forex reserve all over the world is denominated in dollar itself as it is international currency.
If rupee value changes drastically, RBI intervenes in currency cash market and sells or buys currency - thus forex reserve value changes again.
To tackle volatility in global currency, RBI also dabbles in forward contracts from hedging pov. When these contracts mature again forex value changes.
If hot money crosses border with alarming rate RBI intervenes (mops up the excess for ex.) and thus forex reserve value changes again.
Import/export, CAD etc are secondary and incidental/indirect repercussions.
Ross Geller - Unagi.
Richard Parker - Grrrr.
Apart from foreign currency, Gold Reserves are also a component of Forex Reserves.
Any movement of USD with respect to other currencies or any movement in Gold Prices leads to a change in the Forex Reserve levels, as expressed in US Dollar terms.
1. Forex Reserves are reported in USD. So, an appreciation of USD against major currencies would imply that India's reserves go up (considering everything else remains same)
2. However, large appreciation in USD would MOSTLY lead to a "Sterilisation" policy of RBI, wherein RBI would sell USD from its reserves to maintain the Exchange Rate and hence the forex reserves would come down.
Hope this clears your doubt!
@ravi_newbie can u plz substantiate with an example, i think it should be the opposite of what u suggest, i.e. reserves going down if dollar appreciates, because asset value will go down and also RBI's intervention by selling dollars to contain depreciating rupee, will eat into reserves.