Accumulation of Foreign Exchange by Emerging Countries

Table of Contents

Introduction3

Objective of Study3

Hypotheses4

Literature Review5

Methodology7

Results7

Analysis of Brazilian Economy7

Analysis of China Economy9

Analysis of Indian Economy12

Analysis of Russian Economy14

Conclusion16

Accumulation of Foreign Exchange by Emerging Countries

Introduction

This paper focuses on the accumulation of foreign exchange reserves by emerging nations, which is an important topic as it informs us about the reasons why a developing economy may accumulate foreign exchange. In this context, the function of the foreign exchange reserves is to cover any deficits in external accounts and reservations can also be used for protection of speculative attacks against the currency of the country.

The basic reason for foreign exchange reserves is to develop and keep incrasing for for higher accumulation of foreign exchange such that the process of growth does not stop which will ultimately help emerging countries. Besides it, consumer price index which reflects inflation, money market interest rate and exchange rate are the most crucial factors for the accumulation of foreign exchange reserve by developing economies; moreover, the particular focus of this study is on Brazil, China, India and Russia which will guide in determining important the factors for the accumulation of foreign exchange reserves.

Objective of Study

The accumulation of foreign reserves has risks for developing countries. This is because large scale and long accumulation of foreign exchange reserves by a central bank can be a threat to developing countries like Russia, China, Brazil and India. The key points of the study are mentioned below, which will be discussed in the later part of the study:

To maintain the currency from appreciating;

To leave the surplus funds in the financial system;

To control the inflation in economy.

Literature Review

According to past researchers, the central banks of few developing countries get involved in the foreign exchange market to make an attempt to maintain the currency of country from appreciating, and this has led to extraordinary growth of foreign exchange reserves of emerging countries.

Financing the substantial and a long accumulation of foreign reserves has implications for the balance of the central banks that is the banking system and also for the private sector. In various high costs of the intervention and potential difficulties, an undesirable increase in asset prices, credit and growth in failure of the financial system occurs in emerging countries.

In addition to this, intervening in the accumulating reserves and foreign exchange market, central banks have a tendency to mitigate the monetary policy, leaving the surplus funds in the financial system, rather than sterilize or hold back the surplus funds. Foreign exchange reserves are critical for solving the macroeconomic problems as they provide a reliable shield in the event of a recession that is in economic crises, and also serve as a reference for the establishment of a stable exchange rate for the majority of developing economies that include China, India, Russia, and Brazil etc. Foreign exchange reserves are a type of a hedge for exporters of raw materials, as well as serve as a means to be in command of the effects of the substantial entry of ...