Accumulation of Foreign Exchange by Emerging Countries in Last Decade

Accumulation of Foreign Exchange by Emerging Countries in Last Decade

Introduction

The study is related to accumulation of foreign exchange reserve by emerging economies in last decade which is an important aspect to study as it guides towards the factors that why a developing economy prefer to accumulate foreign exchange. The basic reason of this statement is to develop and remain stable such that the process of growth does not stop; besides it, currency appreciation, inflation and use of surplus funds are the most crucial factors for the accumulation of foreign exchange reserve by developing economies in last decade.

Summary of the Main Points

The key points of the study are mentioned below, which are discussed for the accumulation of foreign exchange reserve by developing countries in last decade in;

To maintain the currency from appreciating;

To leave the surplus funds in the financial system;

To control the inflation in economy.

The accumulation of foreign reserves has risks for developing countries; the reason of this statement is that large scale and long accumulation of foreign exchange reserves by central bank intervention can be a threat to developing countries like Russia, China, Brazil and India etc.

According to past researchers, the central banks of few developing countries get involved in the foreign exchange market to make an attempt to maintain the currency of country from appreciating, and this has led to extraordinary growth of foreign exchange reserves of emerging countries.

Financing substantial and a long accumulation of foreign reserves has implications for the balance of the central banks that is the banking system and also for the private sector. In various high costs of the intervention and potential difficulties, an undesirable increase in asset prices, credit and growth in failure of the financial system occurs in emerging countries.

In addition to this, intervening in the accumulating reserves and foreign exchange market, central banks have a tendency to mitigate the monetary policy, leaving the surplus funds in the financial system, rather than sterilize or hold back the surplus funds. Foreign exchange reserves are critical for solving the macroeconomic problems as they provide a reliable shield in the event of a recession that is in economic crises, and also serve as a reference for the establishment of a stable exchange rate for the majority of developing economies that include China, India, Russia, and Brazil etc. Foreign exchange reserves are a type of a hedge for exporters of raw materials, as well as serve as a means to be in command of the effects of the substantial entry of capital. The traditional approach to evaluate the level of reserves is the savings that is they should be in such amount to cover all the operations of import in the six-month period of time. Another way of looking the reserves should be sufficient to compensate for the total short term external debt.

Moreover, in emerging countries like Russia, China, Brazil and India etc, inflation in has been low, to a certain extent that is because of ...