The study of foreign exchange (forex) reserves has assumed importance because of increasing
globalization of emerging market and developing economies. Forex reserves have also become
important in the context of debt crisis leading to banking crisis, which in turn leads to
financial crisis in several countries. The debt crisis in the early 1990s, the 1997 East Asian
Crisis, and the Global Financial Crisis in 2007-08 have posed several challenges to policy
makers in management of forex reserves. The subject of forex reserves can be broadly divided into two parts, viz., the theory of reserves and the management of reserves. The
theory of reserves talks about the rationale behind maintaining reserves, viz., statutory basis,
institutional arrangements, composition of reserves, objectives for holding reserves, exchange
rate regimes, etc. Statutory basis, institutional arrangements, and exchange rate regimes are
country-specific. Forex reserves do not have any unique conceptual definition. However, in
terms of IMF’s Balance of Payments and International Investment Position Manual (BPM6),
forex reserves include the unencumbered international assets which are owned by a central
bank, which can take care of the external payment obligations and the central bank’s
interventions in the domestic forex market.
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