ECONOMY NOTES FOR UPSC

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ECONOMY NOTES FOR UPSC

Economy holds a very important role in UPSC civil service examination be it in prelims or mains. Generally, it is seen that student from non economics background fear a lot with this subject so here we are with the solution i.e. a series of economy notes for upsc examination.

Economy question related to Indian economy are generally asked in prelims and mains but in mains certain occurrence of any event in global arena with light on Indian economy can be asked.

Notes presented here are in a series with a simpler and understandable language so follow regularly to get them.

Note- soon there will also notes for economy survey and budget too.

CHAPTER 6

Forex Reserve

forex-india-reserves-markettimestv.jpg

Reserve bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.

Reserve bank accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.

Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates start rising.

Need of forex reserve:-

  • Funding import(like trade in different commodities in international market the trader may not accept the local currency so to settle trade any accepted currency has to be given.)
  • Debt servicing( means to facilitate or settle borrowings in acceptable currency)
  • Stabilizing domestic currency( it’s known that exchange rate in free market is decide by foreign currency comparision )
  • Confidence building for markets
  • Buffer for shocks( for emergency situation)

The Foreign exchange reserves of India consists of below four categories.

(a) Foreign Currency Assets

(b) Gold

(c) SDRs

(d) Reserve Tranche Position in the IMF

  • Foreign currency assets mean total foreign currency available with RBI.
  • Gold- total gold available with Rbi
  • SDRs is a basket of currency in which certain currency are put in a particular ratio. Basket comprises of Dollar, Pound, Yen, Euro, Renminbi (currency recently added). It is an artificial unit of account created by IMF in 1969. It is neither a claim nor a currency of IMF.
  • Reserve Tranche Position- is a particular percentage of Sdr that a currency can use for it’s settlement.
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