Foreign Exchange Reserves, exchange rate and CAD

This is how I have interpreted the economics behind forex reserves, exchange
rate and CAD: Just a brief discussion. Comments and thoughts are welcome.

The supply of foreign exchange of a given currency stems from the sale of
foreign merchandise, services, and capital to that country. When foreigners want
to buy a countrys exports, they must purchase it with currency of their own.
Thus the supply of one countrys currency available to a second country is
closely related to the demand for the second countrys currency. When the
demand schedule of a given country for a foreign currency is known, the supply
schedule of the foreign countrys exchange can be frequently derived from it.

What are nominal and real exchange rates?

Say for example you want to find out the exchange rate between dollar and
rupee, i.e. value of one dollar in terms of rupee. The exchange rate will be
determined by the supply and demand of dollars India has. So, if you draw a
demand-supply curve, the horizontal axis would be dollars and the vertical axis
would be price of dollars, and the equilibrium price of dollar in terms of rupees is
where the demand and supply intersect. It is just like any other commodity.
Supply of dollars: When India exports, it gets payment in dollars and hence is the
supply of dollars in India. Not only export of goods and services add to supply of
dollars in India, also holding foreign assets (say foreign bonds) add to the supply
of dollar. If India wants it can sell foreign bonds and get the dollars.
Demand for dollars: When India imports, it has to pay in dollars and thats why
there exist demand for dollars.
So when import is more than exports for India, this implies demand for dollars is
more than supply of dollars. If you consider the demand-supply diagram, this
would happen when the dollar price (in terms of rupee) is below the equilibrium
price. Now when demand is greater than supply, price of dollar would increase,
like any other commodity, and thus we see a depreciation of Indian rupee.

Current account deficit and forex reserves:

So with a CAD (demand for dollars is greater than supply), foreign exchange
reserves are depleted. Foreign exchange market has to now clear at a
devaluated rupee. The devaluation of rupee does its part of job to increase
export and reduce supply (bringing dollars and reducing outflow). But the central
bank has to also come in and say, for example restrict imports to slowly bring
back the rupee up by building forex reserves.