What are Forex Reserves and Why countries hold big reserves
                     WHAT ARE FOREX 
RESERVES AND 
WHY COUNTRIES 
HOLD BIG 
RESERVES?
WHAT ARE FOREX 
RESERVES?
• Foreign exchange reserves are assets held 
on reserve by a central bank in foreign 
currencies. 
• These reserves are used to back liabilities 
and influence monetary policy.
Source: www.investopedia.com
HOW FOREIGN EXCHANGE 
RESERVES WORK?
• Foreign exchange reserves can include 
banknotes, deposits, shares, bills of 
treasury and other securities. 
• The most important function of these 
reserves is to ensure that a central 
government entity has back-up capital, 
should their national currency devalue or 
become insolvent together quickly.
Source: www.business-standard.com
WHY COUNTRIES HOLD 
BIG RESERVES?
• The main cause of the increase in projected 
reserves is the growth in investments and 
international direct investors' portfolio 
(FDIs). 
• During the last few months, international 
investors have purchased shares in a 
variety of firms.
Source: www. thebalance.com
KEEP THE VALUE OF CURRENCIES 
AT A FIXED RATE
• First of all, countries use their foreign 
exchange reserves to preserve a set rate of 
their currencies. 
• China, which ties its currency value, the 
yuan, to the dollar, is a clear example.
Source: www.investopedia.com
FLOATING EXCHANGE 
RATE SYSTEM
• Funds are being used by those that have a 
floating exchange mechanism to hold the 
currency value lower than the dollar. 
• Although a floating scheme is Japan's 
economy, the yen, the Central Bank of 
Japan buys US treasuries to retain their 
worth below the dollar. 
Source: www. bbalectures.com
MAINTAIN LIQUIDITY
• In the event of an economic recession, it is 
important that liquidity be preserved. 
• This limits their foreign exchange supply to 
pay for imports. 
• The central bank will then exchange its 
foreign currency for its local currency, 
helping it to pay and accept imports.
Source: www.investopedia.com
SHORTAGE IN FOREIGN 
CURRENCY
• Similarly, whether a nation has a war, a 
military takeover or a some confidence 
blow, foreign investors are talked of. 
• The value of local currency is therefore 
decreased and less people want it. 
• This raises the cost of imports and causes 
inflation.
Source: www. world-today-news.com
KEEP MARKETS STEADY
• In order to keep the markets open, the 
central bank issues foreign exchange. 
• The local currency is also bought to help its 
value and avoid inflation. 
• This reassures tourists from overseas 
countries who return to the economy.
Source: www.pbucc.org
PROVIDE CONFIDENCE
• The central bank guarantees the right of 
international investors to safeguard their 
investment. 
• It would also keep the nation from 
unexpectedly fleeing to security and capital 
damage. 
• This will deter an economic recession 
triggered by an incident that sparks a flight 
into stability by a strong role within foreign 
exchange reserves.
Source: www.investopedia.com
TO MEET EXTERNAL 
OBLIGATIONS
• Reserves are often important to guarantee 
that a government fulfils its external 
obligations. 
• They can provide import finance and the 
opportunity to absorb unexpected 
movement of resources.
Source: www.investopedia.com