P a g e
Background of the project1.1
Foreign Exchange Reserves are the reserves that a governmentmaintains in the form of foreign currency deposits and bonds, gold, SDR¶s, IMFreserve etc, to back their liabilities.
Looking at the history, theoperations in the foreign exchange market began in a big way only after the breakdown of the Bretton Woods system in1971. In Bretton Woods system, every country was obliged to maintain theexchange rate of it¶s currency with a fix amount of gold, plus or minus one percent. IMF had the authority to maintain any imbalance of payment
To begin with, I all realized the importance of ForeignExchange Reserve in 1991 when the crisis of Balance of Payment hit India. Indiahad to transfer 47 ton Gold to Bank of England and 20 ton Gold to the UnionBank of Switzerland as a security. The very fact that the country was about todefault on its payment was a major embarrassment for the country.
The major problem with India¶s progress was the lack of capital. India was notable to capitalize on the large amount of natural resources. Considering thesefacts government gave permission to the Indian banks for intra day trade inforeign exchange market in 1978. Today over 70% of the trading in foreignexchange continues to take place in the inter-bank market. After the opening of the markets in 1992, India has witnessed a large amount of foreign exchangeinflow and outflows. The exchange rate of the rupee that was pegged earlier wasfloated partially in March 1992 and fully in March 1993. This resulted in marketdetermined exchange rate of the rupee.India adopted Current AccountConvertibility of the Rupee on August 20, 1994.
Looking at the last decade I can say that there has been tremendousincrease in the mobility of international capital. Indian companies are goingabroad to raise capital by using instruments such as ADR and GDR. On the other hand foreign companies and investors are putting their money in India by FDI¶sand FII¶s.