DETERMINANTS OF FOREIGN EXCHANGE RESERVES IN INDIA

Abstract

Motivation/Background: A country holds foreign exchange reserves for maintaining liquidity and safety. The country possess certain amount of foreign reserves to meet their day to day operations and to meet the unforeseen contingencies. The optimum level of reserves helps a country to be self-reliant and have a self-sufficiency to meet their payment obligations. Methods: The paper has used double log regression model to find out the relevant and significant determinants of foreign exchange reserves in India. There are several factors like exchange rate regime, quality of institutions, history of financial crisis, degree of openness, country to country differences, dominate in conceptualizing and measuring reserve adequacy for any country. Results: The results of the current study shows that inflow of FDI, exchange rate, exports, short term debt and time affects the value of foreign exchange reserves in India. Conclusion: The study concludes that there are four major macroeconomic factors that affect the value of foreign exchange reserves and it is statistically significant also.  The current paper can be of great use for the policy makers of India, in a way that they should consider the relevant determinants of foreign exchange reserves while accumulating it.