Assuming people are buying the foreign currencies and hold it in their domiciliary account and not used in another country for buying of goods to be imported, is the foreign reserves decreasing like that? I mean if the foreign currencies is bought by the citizens of a country and hold in their bank account, and not used to buy from another country.
First, you might want to change the domiciliary account to something like a USD/foreign currency account for more people to understand. My experience with international dealings shows that domiciliary accounts are known in Nigeria and perhaps a very few other countries.
As for the question, Foreign reserves are the assets in the care of the central banks of a country and they could be bonds, deposits/banknotes and other securities backed by the government and contractual agreements. In your case, the deposit is part of it, but mind you, the reserves are often used to back liabilities as well. Just because you deposited $1000 doesn't mean that a liability of $5000 will not happen on the same day. So, as you deposit your foreign currency, the bank merely owes you that amount but that doesn't mean that particular deposit wouldn't be spent as the foreign reserves continue to find the concluding summation between the country's assets and liabilities. And if citizens do not spend from the reserve, the government might.
In case all of the citizens didn't spend FX but deposited, the government would still sustain their foreign obligations. But in this case, if the government earns more FX on their own, then it won't depend on citizens' FX savings and the foreign reserves will not be affected but increase. In case both the government and citizens decide not to spend their foreign reserves but add to it, of course, it will continue to grow.
