Foreign exchange
Also called: Forex · Topic: Balance of Payments and Exchange Rates · NCERT: Class 11, Ch 2 "Indian Economy 1950-1990"; Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"; Class 11, Ch 8 "Comparative Development Experiences of India and its Neighbours"
Meaning
Foreign exchange (forex) means foreign currencies and claims that are payable in them. A country earns it mainly through exports, remittances (money sent home by citizens working abroad) and capital inflows. It spends forex on imports, on debt service (paying interest and principal on foreign loans) and on investment abroad. Enough forex is vital to pay for essential imports such as petroleum.
Example
In mid-1991, India's foreign currency assets fell to about US$1 bn, barely enough for two weeks of imports. That shortage forced India to pledge gold and borrow from the IMF. By 2023-24, reserves had grown to about US$646 bn.
Don't confuse with
- Foreign exchange rate: this is the price of one currency in terms of another, such as ₹50 per $1. Foreign exchange is the currency itself.
Related concepts
- Foreign exchange market
- Foreign exchange rate
- Demand for foreign exchange
- Supply of foreign exchange
- Flexible exchange rate
- Currency depreciation
- Currency appreciation
- Currency speculation
- Interest rate differential
- Interest rate parity