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Indian Economy

Notes
Example: The average cost of employing labour in Europe, including social and welfare
costs, is $ 20 an hour, $ 19 in the United States and $ 18 in Japan — and a rough average of $ 1.65
in most of Asia.

9.6 Foreign Exchange Reserves

This section lays emphasis on the foreign exchange reserve. Foreign-exchange reserves (also
called forex reserves or FX reserves) are assets held by central banks and monetary authorities,
generally in dissimilar reserve currencies, typically the United States dollar, and to a smaller
degree the euro, the United Kingdom pound sterling, and the Japanese yen, and used to back its
obligations, e.g., the local currency delivered, and the various bank reserves deposited with the
central bank, by the administration or financial institutions.
You must understand that in a strict intellect, foreign-exchange reserves ought to only comprise
foreign exchange deposits and bonds. Though, the term in popular sage usually also adds gold
reserves, special drawing rights (SDRs), and International Monetary Fund (IMF) reserve positions.
This wider number is more readily available, but it is more precisely referred to as official
international reserves or international reserves.
Foreign Exchange reserves are termed as Reserve Assets in the Balance of Payments and are
placed in under the financial account. Hence, they are generally a significant part of the
International Investment Position of a country. The reserves are labelled as reserve properties
below assets by functional category. In terms of financial assets classifications, the reserve assets
can be secret as Unallocated gold accounts, Gold bullion, currency, Special drawing rights,
Reserve position in the International Monetary Fund, interbank position, other moveable
deposits, other deposits, loans, debt securities, listed and unlisted equity, investment fund shares
and financial derivatives, for instance forward contracts and options.
You must remember that there is no counterpart for reserve assets in liabilities of the International
Investment Position. Generally, when the monetary authority of a country has certain kind of
liability, this will be comprised in other classes, such as Other Investments. In the Central Bank’s
Balance Sheet, foreign exchange reserves are assets, along with domestic credit.

9.7 Capital Account Convertibility and Current Account Convertibility

In this section, you will learn about the capital account convertibility and the current account
convertibility.
Capital Account Convertibility

You must understand that it means the choice to change the local monetary assets into foreign
assets and vice versa at rates of exchange determined by the markets. It talks about to the
removal of the restraints on international flows on a country’s capital account, allowing full
currency convertibility and opening of the monetary system. Capital account convertibility is
measured to be one of the main types of a developed economy. It supports attract foreign
investment. At the same time, capital account convertibility makes it easier for national
companies to tap international markets. It is sometimes referred to as Capital Asset Liberation.

Current Account Convertibility
It is essential to keep in mind that current account convertibility lets free flow for all-purpose
other than for capital purpose such as investment and loans. In other words, it permit inhabitants

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