Which of the following statements is/are correct?
- Most of India’s reserves is held in the form of foreign currency.
- There is no cost of holding foreign currency as reserves by a nation.
Select the correct answer using the code given below.
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC CDS-1 – 2024
– Statement 2 is incorrect. Holding foreign currency reserves incurs costs. These include the opportunity cost (the return that could have been earned if the funds were invested domestically or in higher-yield assets instead of low-yield reserves), potential losses due to exchange rate fluctuations (if the reserve currency depreciates), and administrative costs of managing the reserves.