The formulation of a country's trade policy has an enormous impact on its foreign exchange reserve management. In this article, the author provides a thorough understanding of how the foreign exchange has passed various phases that were primarily driven by the exports and imports of the nation. The author firmly feels that managing exchange rates as well as foreign exchange reserves calls for a formulation of sound foreign trade policy.
India's present trade policy aims to double the country's world trade share in the five-year period 2004-09 and use trade as a tool to promote economic growth that will generate employment, especially in the rural areas. The policy is circumscribed by the mandate of the Parliament through the Foreign Trade (Development and Regulation) Act, 1992 to regulate imports and promote exports.
Imports and exports have a direct impact on foreign exchange rates as well as foreign exchange reserves as exports contribute to the supply of foreign currency, whereas imports contribute to the demand for foreign currency. However, there are other sources of supply and demand for foreign currency such as invisibles and capital account transactions. So, prima facie, the role of international trade in merchandise is of limited significance in the overall context of managing foreign exchange rates/reserves.
The trade policy is formulated and implemented by the Ministry of Commerce through the Directorate General of Foreign Trade, while the Ministry of Finance through the Reserve Bank of India, deals with foreign exchange management. |
