The correct option is 1 only
Explanation
Foreign Exchange Reserves are external assets held by a central bank to back liabilities and influence monetary policy. In India, the Reserve Bank of India (RBI) manages these reserves to ensure external stability and maintain liquidity for international transactions.
Statement-wise Analysis:
- Statement 1 is Correct: A primary function of foreign exchange reserves is to provide import cover. They are maintained to facilitate the payment for essential imports, such as petroleum (crude oil) and other critical commodities, ensuring the country can meet its external obligations even during economic shocks.
- Statement 2 is Incorrect: The Balance of Payments (BoP) crisis of 1991 was triggered because India’s foreign exchange reserves had fallen to critically low levels. At the height of the crisis, the reserves were sufficient to finance imports for only about two to three weeks, not more than a year.
- Statement 3 is Incorrect: The reserves do not consist mainly of gold and silver. The largest component of India's forex reserves is Foreign Currency Assets (FCA) (held in currencies like the US Dollar, Euro, Pound, etc.). The four components of India's Forex Reserves are:
- Foreign Currency Assets (FCA) - The dominant component.
- Gold.
- Special Drawing Rights (SDRs) with the IMF.
- Reserve Tranche Position (RTP) in the IMF.
Key Takeaway:
India's Foreign Exchange Reserves are dominated by Foreign Currency Assets (FCA), not bullion. The 1991 economic reforms were necessitated by a severe liquidity crisis where reserves dropped to less than a month of import cover.