Question

According to the Reserve Bank of India’s (RBI’s) Statistical Supplement released on 19th May, 2023:
“India’s foreign exchange reserves grew for the third straight week and reached near an approximate level of $600 billion.”
The above situation will ----- the ----- side of Balance of Payments account of India.
(Choose the correct alternative to fill in the blanks)

• A. Increase, Credit
• B. Decrease, Credit
• C. Decrease, Debit
• D. Increase, Debit

Hint:

An increase in foreign exchange reserves is recorded on the debit side of the Balance of Payments as it represents an outflow of domestic currency.

Answer 1

The Correct Option is D

Foreign exchange reserves increase when the Reserve Bank of India (RBI) purchases foreign currency, leading to an outflow of domestic currency. This transaction is recorded as a debit entry in the Balance of Payments (BoP) under the financial account. Conclusion: Since an increase in forex reserves is a debit transaction in the BoP, option (D) is correct.