According to IMF, many countries keep reserves to meet external obligations, limit external vulnerabilities, provide a level of confidence to markets, etc. The level of reserves in any country will depend on that country's needs and desires. While many countries keep higher than required level of reserves, excess reserves can also pose many risks. Most countries keep their reserves with the Bank for International Settlements (BIS) for safety though the returns are low.

Central banks all over the world are vested with the responsibility of managing foreign exchange reserves of their respective countries. With the growth of external trade and cross-border capital flows, foreign currency funds flow from one country to another. Such flows are predominantly in US dollar and, thus, foreign exchange reserves of countries have a greater composition of the US dollar. With the liberalization of capital accounts in many emerging market economies, these economies are emerging as attractive investment destinations for investors from developed countries.

Generally, the foreign exchange reserves of countries consist of currencies that are freely convertible in international markets. However, the US dollar has been chosen as the reporting currency of the reserves. Since depreciation of non-dollar currencies in the reserves would affect the total value of reserves in dollar terms, central banks constantly keep shifting the composition of reserve currencies, which depreciate in value in the international markets. Central banks keep a watch over the developments taking place in the foreign exchange markets, which have a direct impact on the value of the reserves.

Traditionally, cross-border trade among countries creates settlement in foreign exchange. A healthy trend in trade (exports and imports) results in generation of surplus and may ultimately find place in the reserves of the country provided there are other positive capital flows also. The net of service related invisible flows adjust the trade deficit, if any or add to the surplus and create current account surplus or deficit. The capital account convertibility/liberalization in many economies has encouraged flow of capital investments.

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