Which of the following statements is/are correct? 1. Most of India's reserves is held in the form of foreign currency. 2. There is no cost of holding foreign currency as reserves by a nation. Select the correct answer using the code given below.

India's foreign exchange reserves consist of four components: Foreign Currency Assets (FCA), Gold, Special Drawing Rights (SDRs), and the Reserve Tranche Position (RTP) in the IMF [1]. Statement 1 is correct as FCAs constitute the largest share, historically exceeding 90% of the total reserves [4]. Statement 2 is incorrect because holding foreign currency reserves involves significant costs. These include the 'opportunity cost,' which is the difference between the low returns earned on safe foreign assets (like US Treasury bonds) and the higher returns that could be achieved if those funds were invested in domestic infrastructure or development [4]. Additionally, central banks may incur 'carrying costs' when they issue domestic debt to sterilize the liquidity created by purchasing foreign exchange. Therefore, while reserves provide a precautionary benefit, they are not cost-free [4].

Sources

1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > FOREIGN EXCHANGE RESERVES > p. 483
2. [4] https://en.wikipedia.org/wiki/Foreign-exchange_reserves_of_India
3. [2] https://www.sciencedirect.com/science/article/abs/pii/S0161893806000494