Foreign Exchange Reserves Legal Framework

Here are the notes on the foreign exchange reserves legal framework in India, with multiple choice questions and answers:

Foreign Exchange Reserves

Foreign exchange reserves are the assets held by a country’s central bank in foreign currencies. These reserves are used to support the country’s currency, to finance trade deficits, and to meet other international obligations.

Legal Framework

The legal framework for foreign exchange reserves in India is provided by the Reserve Bank of India Act, 1934. This Act gives the RBI the power to manage the country’s foreign exchange reserves.

The RBI Act also specifies the following:

  • The composition of the foreign exchange reserves.
  • The manner in which the foreign exchange reserves can be used.
  • The conditions under which the foreign exchange reserves can be borrowed or lent.

Multiple Choice Questions

  1. Which of the following is not a function of foreign exchange reserves?
    • To support the country’s currency.
    • To finance trade deficits.
    • To meet other international obligations.
    • To invest in foreign assets.
    • The answer is To invest in foreign assets.
  2. Who is responsible for managing the foreign exchange reserves in India?
    • The Ministry of Finance.
    • The Reserve Bank of India.
    • The Securities and Exchange Board of India.
    • The Insurance Regulatory and Development Authority of India.
    • The answer is The Reserve Bank of India.
  3. What is the composition of the foreign exchange reserves in India?
    • Foreign currency assets.
    • Gold.
    • Special Drawing Rights.
    • Reserve position in the International Monetary Fund.
    • All of the above.
    • The answer is All of the above.
  4. How can the foreign exchange reserves be used?
    • To support the country’s currency.
    • To finance trade deficits.
    • To meet other international obligations.
    • To intervene in the foreign exchange market.
    • All of the above.
    • The answer is All of the above.
  5. What are the conditions under which the foreign exchange reserves can be borrowed or lent?
    • The borrowing or lending must be approved by the RBI.
    • The borrowing or lending must be for a specific purpose.
    • The borrowing or lending must be on a commercial basis.
    • All of the above.
    • The answer is All of the above.