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Context: India's foreign exchange reserves experienced a decline of USD 1.9 billion according to RBI data, bringing the total reserves to USD 607.03 billion for the week ending on 21 July.
- During the reported period, foreign currency assets (FCAs) decreased by USD 2.41 billion, resulting in a total of USD 537.75 billion.
- These FCAs are calculated in dollar terms and include the impact of non-US currency units like the euro, pound, and yen held in the foreign exchange reserves, accounting for their appreciation or depreciation.
- On the positive side, gold reserves grew by USD 417 million, reaching USD 45.61 billion.
- Special Drawing Rights (SDRs) saw a decrease of USD 11 million, lowering the total to USD 18.47 billion.
- India's reserve position in the International Monetary Fund (IMF) increased by USD 21 million, now standing at USD 5.2 billion.
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FOREX RESERVES: https://www.iasgyan.in/daily-current-affairs/forex-reserves-35
Q. How do foreign exchange reserves help protect a country against external economic shocks?
1. By stabilizing the stock market
2. By increasing government spending
3. By providing liquidity and confidence in the currency
4. By reducing taxes on imports
How many of the above statements is/are correct?
A) Only 1
B) Only 2
C) Only 3
Statement 3 is correct: By providing liquidity and confidence in the currency. Foreign exchange reserves provide a buffer against external economic shocks by ensuring that a country has sufficient foreign currency to meet its external obligations, such as paying for imports or servicing foreign debt. They also instil confidence in the currency and the economy, which can be crucial during times of economic uncertainty.