This section needs additional citations for verification. In a strict sense, foreign-exchange reserves should only include foreign banknotes, foreign bank deposits, foreign wikipedia forex reserves of india bills, and short and long-term foreign government securities. Foreign-exchange reserves are called reserve assets in the balance of payments and are located in the capital account.
Theoretically, in this case reserves are not necessary. Non-sterilization will cause an expansion or contraction in the amount of domestic currency in circulation, and hence directly affect inflation and monetary policy. For example, to maintain the same exchange rate if there is increased demand, the central bank can issue more of the domestic currency and purchase foreign currency, which will increase the sum of foreign reserves. Thus, intervention does not mean that they are defending a specific exchange rate level. After the end of the Bretton Woods system in the early 1970s, many countries adopted flexible exchange rates.