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Which statement about foreign exchange reserves held by the Reserve Bank of India is correct?

Foreign exchange reserves are held by the RBI to curb excessive rupee volatility and assure that external obligations can be met. They consist mainly of foreign currency assets, plus gold, SDRs and the IMF reserve position, not just gold or rupee securities.

  1. AThey are used to manage excessive volatility in the rupee and to provide confidence in meeting external obligationsCorrect
  2. BThey are held only in the form of gold
  3. CThey are used to fund the central government's fiscal deficit directly
  4. DThey consist only of rupee-denominated securities

Explanation

RBI holds reserves mainly as foreign currency assets, along with gold, SDRs and the reserve tranche position with the IMF. They allow RBI to intervene against disorderly exchange rate moves and support external payments. They are not rupee securities and are not used to finance the fiscal deficit directly.

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