What are Forex Reserves? Why is it important?

What are Forex Reserves?

Forex reserves are money or other assets held by a central bank or other monetary authority so that it can pay its liabilities if needed, such as the currency issued by the central bank, as well as the various bank reserves deposited with the central bank by the government and other financial institutions.


Why Forex Reserves are important for a Country?

1. It increases the confidence in the monetary and exchange rate policies of the government.

2. It enhances the capacity of the central bank of the country to intervene in the foreign exchange market and control any adverse movement and stabilize the foreign exchange rates to provide a more favorable economic environment for the progress of the country.

3. During the time of any crisis, foreign exchange reserves come to the rescue of any country so as to absorb the distress related to such a crisis.

4. It also adds to the comfort of market participants that domestic currency is backed by external assets and hence it also helps the equity markets of the country because due to strong reserves many people from foreign countries are willing to invest in the country having strong foreign exchange reserves.

What affects the country due to forex reserves?

The accumulation of reserves might induce two types of crisis:
First, it might lead to over-borrowing and overinvestment in the reserve currency country and cause a financial crisis when expectations worsen or the reserve accumulation ends.

Second, by steadily worsening the net foreign asset position of the reserve currency country, it might result in a currency crisis where the reserve currency country deliberately decides to devalue its currency.

List of top 10 countries with highest forex reserves:

Rank Country Foreign Currency Reserves (in billions of U.S. dollars)
1 China $3,210.00
2 Japan $1,259.30
3 Switzerland $804.30
4 Saudi Arabia $501.30
5 Russia $460.60
6 Taiwan $459.90
7 Hong Kong $424.80
8 India $403.70
9 South Korea $402.40
10 Brazil $379.40

 

List of top 10 countries with lowest forex reserves:

Rank Country Foreign and Gold Reserves (thousands of USD)
1 Sao Tome and Principe 63,520
2 Micronesia 75,060
3 Dominica 103,000
4 Samoa 140,700
5 Saint Vincent and the Grenadines 157,400
6 Tonga 158,800
7 The Gambia 159,300
8 Sudan 181,500
9 Vanuatu 184,000
10 Eritrea 218,900
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