ISAS Working Papers

Asymmetric foreign exchange intervention by the Reserve Bank of India (RBI) has resulted in a sustained accretion of India's foreign exchange reserves. The reserve buildup in India has certainly been impressive, rising from around US$5-6 million in 1991, to nearly US$300 billion in mid 2008. In addition to addressing the issues of reserve adequacy, this paper examines the forms the reserves have taken (asset and currency composition), and the extent to which India's reserve holdings are diversified. The issue of reserve adequacy was made apparent during the 1990s and early 2000 when rapid reserve depletion became a defining and determining feature of the series of currency crises that hit emerging economies. There are several broad measures of reserve adequacy that are used in literature, which despite any theoretical backing, are useful broad benchmarks of a country's ability to manage a balance of payments shock. In order to assess the adequacy of India's stock of international reserves, the paper considers a few such standard measures such as the ratio of reserves-to-GDP, reserves-to-imports, reserves-to-short-term external debt and reserves-to-broad money (M2) and finds that India's reserve stock is more than adequate, placing them in a much better position than many other emerging economies.