Foreign-exchange reserves are assets held by central banks (RBI) and monetary authorities like IMF, majorly in different reserve currencies (in India it’s majorly in USD). It also also adds gold reserves, special drawing rights (SDRs), and International Monetary Fund (IMF) reserve positions.
BoP is an accounting record of all the monetary transaction between a country and the rest of world. It summarizes the international transaction for a specific period – quarter, annual. It consists of two principal parts – the current account and the capital account.
Capital account convertibility means that the home currency can be freely converted into foreign currencies for acquisition of capital assets abroad. The rupee is currently not freely convertible on the capital account.
The Asian Clearing Union (ACU) was established with its headquarters at Tehran, Iran, on December 9, 1974 at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP), for promoting regional co-operation. The main objective of the clearing union is to facilitate payments among member countries for eligible transactions on a multilateral basis, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade among the participating countries. The Central Banks and the Monetary Authorities of Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka are currently the members of the ACU. The Asian Monetary Units (AMUs) is the common unit of account of ACU and is denominated as ‘ACU Dollar’ and ‘ACU Euro’, which is equivalent in value to one US Dollar and one Euro respectively.
Real Effective Exchange Rate (REER) is defined as a weighted average of nominal exchange rates adjusted for relative price differential between the domestic and foreign countries, relates to the purchasing power parity (PPP) hypothesis.
Nominal Effective Exchange Rate (NEER) is the weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies.
The RBI on a monthly basis has been publishing 6-currency and 36-currency REER and NEER indices.
The ‘Impossible Trinity’ states that a country can’t simultaneously maintain a fixed exchange rate, independent monetary policy, and free capital movement due to inherent trade-offs. Proposed by economist Robert Mundell..
