Official reserve account forms a special feature of the capital account. This account records the changes in the part of the reserves of other countries that is held in the country concerned. These reserves are held in three forms: in foreign currency, usually but not always the US dollars, as gold, and as Special Deposit Receipts (SDRs) borrowed from the IMF. Note that the reserves do not have to be held by the country. Indeed most of the countries hold a proportion of the reserves in accounts with foreign central banks.
The IMF account contains purchases (credits) and repurchases (debits) from the IMF. SDRs – Special Drawing Rights – are a reserve asset created by the IMF and allocated from time to time to member countries. Within certain limitations it can be used to settle international payments between monetary authorities of member countries. An allocation is a credit while retirement is a debit. The Reserve and Monetary Gold account records increases (debits) and decreases (credits) in reserve assets. Reserve assets consist of RBI’s holdings of gold and foreign exchange (in the form of balances with foreign central banks and investment in foreign government securities) and government’s holding of SDRs.
The change in the reserves account measures a nation’s surplus or deficit on its current and capital account transactions by netting reserve liabilities from reserve assets. For example, a surplus will lead to an increase in official holdings of foreign currencies and/or gold; a deficit will normally cause a reduction in these assets.
For most of the countries, there is a correlation between balance-of-payments deficits and reserve declines. A drop in reserves will occur, for instance, when a nation sells gold to acquire foreign currencies that it can use to meet the deficit in the balance of payments.
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