Read the passage carefully and answer the questions based on the passage:

Balance of Payment

Balance of Payment is defined as the statement of accounts of a country's inflows and outflows of foreign exchange during a specified period of time. It consists of two main accounts, i.e. Current Account and Capital Account. A deficit or surplus in the current account is determined by the country's exports and imports, whereas the capital account records transactions involving non-financial and financial assets.

India's BOP typically reflects its trade deficit, services surplus and capital inflows. To finance the deficit in its overall BOP, few transactions take place in its official reserves of foreign exchange.

What is the role of official reserve account?

Stabilize the currency and manage BOP imbalance.

The correct answer is Option (3) → Stabilize the currency and manage BOP imbalance.

According to the passage, to finance the deficit in its overall BOP, transactions take place in the official reserves of foreign exchange. This clearly indicates that the role of the official reserve account is to stabilize the currency and manage BOP imbalance.

The official reserve account plays a crucial role in maintaining the balance of payments equilibrium. When there is a deficit in the overall balance of payments, the country uses its official reserves of foreign exchange to cover the shortfall. This helps stabilize the domestic currency and manage external imbalances. Official reserve transactions are more relevant under a regime of fixed exchange rates than when exchange rates are floating.