Adequacy of foreign exchange reserves of a country is captured by whic

Adequacy of foreign exchange reserves of a country is captured by which of the following indicators?

Reserves to import ratio
Reserves to external debt ratio
Reserves to GDP ratio
Reserves to monetary aggregates

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1 and 3 only

1, 2, 3 and 4

2, 3 and 4 only

1, 2 and 4 only

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This question was previously asked in

UPSC CAPF – 2023

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Assessing the adequacy of a country’s foreign exchange reserves involves looking at multiple indicators because reserves serve various purposes (financing imports, managing external debt, dealing with capital outflows, maintaining exchange rate stability).
1. Reserves to import ratio: Measures the capacity to cover future import bills.
2. Reserves to external debt ratio: Indicates the ability to meet external debt obligations, particularly short-term debt.
3. Reserves to GDP ratio: Provides context on the size of reserves relative to the overall economy.
4. Reserves to monetary aggregates (like M2): Assesses vulnerability to potential capital flight if domestic money supply seeks to convert to foreign currency.
All these ratios provide valuable insights into different aspects of reserve adequacy and external vulnerability.

Adequacy of foreign exchange reserves is a multifaceted concept, evaluated using various ratios that relate reserves to potential drains such as imports, external debt, and domestic money supply.

While specific target levels for each ratio may vary depending on the country’s economic structure, exchange rate regime, and integration into global financial markets, all four listed indicators are commonly used by international bodies (like the IMF) and analysts to assess the strength and adequacy of a country’s reserve position.

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