In what way the Reserve Bank of India manages foreign exchange reserves as the custodian of the country's foreign exchange reserves, under the provisions of the Reserve Bank of India Act, 1934?

The Reserve Bank of India, as the custodian of the country's foreign exchange reserves, is vested with the responsibility of managing its investment. The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934. The Reserve Bank's reserves management function has in recent years grown both in terms of importance and sophistication for two main reasons. First, the share of foreign currency assets in the balance sheet of the Reserve Bank has substantially increased. Second, with the increased volatility in exchange and interest rates in the global market, the task of preserving the value of reserves and obtaining a reasonable return on them has become challenging. The basic parameters of the Reserve Bank's policies for foreign exchange reserves management are safety, liquidity and returns. While safety and liquidity continue to be the twin-pillars of reserves management, return optimisation has become an embedded strategy within this framework for the Reserve Bank. The Reserve Bank has framed policy guidelines stipulating stringent eligibility criteria for issuers, counterparties, and investments to be made with them to enhance the safety and liquidity of reserves. The Reserve Bank, in consultation with the Government, continuously reviews the reserves management strategies. Within this framework, the Reserve Bank focuses on: Maintaining market's confidence in monetary and exchange rate policies. Enhancing the Reserve Bank's intervention capacity to stabilise foreign exchange markets. Limiting external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis, including national disasters or emergencies etc.