ECONOMY
Key role of foreign exchange reserves
A
EKL Desk
n exchange rate can be defined as the value of one country’s money in terms of the currency of another country. Exchange rates tell you how much a currency is worth in a foreign denomination. It is the price being charged to purchase that currency.
rate provides a conversion tool which allows expressing the prices of one country in terms of the units of measurement of the other country. Exchange rates are much more than just relative prices. Unless properly managed they can harm a country’s economy.
If countries remain completely isolated and there is no international trade, then it is not important to have the concept of an exchange rate. But once countries start exchanging goods and services among themselves then a conversion tool becomes essential. This is the basic and fundamental role played by an exchange rate.
A key issue in expressing the exchange rate is the choice of the reference currency. Since a currency is essentially identified with a state or country like dollar for the US (or a group of states like in the Euro area), technically while the domestic country (or its central bank) can print any amount of its own currency, it cannot print a single note of foreign currency.
Each country measures the price of its goods and services in international trade using a particular scale of measurement. The exchange
Thus, a country has to earn (and spend) a foreign currency through different means. Five such means in broad terms are: (a) exports/
26
January 2020
Executive Knowledge Lines
