Are you willing to know the detailed information about the RBI as Custodian of Foreign Exchange Reserves? Here is the article which provides you the clean and clear information about the RBI as Custodian of Foreign Exchange Reserves. The RBI acts as the custodian of the country's foreign exchange reserves, manages exchange control and acts as the agent of the government in respect of India's membership of the IMF. Under it, control was imposed on both the receipts and payments of foreign exchange.
Post-independence, Indias exchange rate was fixed by the RBI against the pound sterling, under the fixed (or) pegged exchange rate of mechanism. Subsequently, the exchange rate under the fixed exchange rate of the mechanism was changed to dollars and then to a basket of currencies.
The first step at reforms in the exchange rate of management was taken in the year of 1993 and then referred to as " Liberalization Exhcnage Rate of Management System", (or) LERMS. Under this, the dollar was used as intervention currency, which is implied that primary exchange rate, of all official government statistics, would be denominated in U.S. dollar in terms of global trends and convenience. Under LERMS there was a 'Dual Exchange rate', one officially decided by the RBI and the other through the market forces. All foreign exchanges transactions up to 40% were to be at the official rate and the remaining at the market rate.
Any act of interferences by a Central Bank like the RBI in influencing the exchange rate is called as "Dirty floats". But in India, it is referred to as "Managed Floats". In adverse circumstances of demand for dollars going up more than the supply of dollars, it results in rupee losing value. Though it can positively impact exports and discourage imports, it is usually seen as an erosion of faith in the home currency and can escalate into a Currency crisis.
In such type of circumstances, the government has to sell foreign currency to argument the supply of dollars. However, the experience has been that more the currency is sold, more is the depreciation. Thus RBI instead of Targeting any exchange rate intervenes in the foreign exchange market only to manage the violating and disruptions to the macroeconomic situation.
