Why is the low level of foreign exchange reserves a critical problem for India?
Show answer & explanation
Correct answer: D
Explanation
Foreign exchange reserves are like a "savings account" for a country. India imports most of its crude oil and electronics, which must be paid for in international currencies (such as the dollar).
If these reserves fall, the country could face a balance of payments crisis.
Importance of Foreign Exchange Reserves:
Import Cover: This measures how many months of imports we have.
Low reserves mean we may be unable to purchase essential goods (such as oil, medicines).
Rupee Stability: Low reserves can cause the value of the Indian rupee to fall in the foreign market, leading to inflation in the country.
International Creditworthiness: High reserves increase India's creditworthiness internationally.