Main Note - [Foreign Exchange Management](Foreign%20Exchange%20Management.md)
This note focusses on various speeches, but primarily on Dr. Y.V. Reddy's speech on [India’s Foreign Exchange Reserves : Policy, Status and Issues](RBI_Speech_20020510_India’s%20Foreign%20Exchange%20Reserves%20-%20Policy,%20Status%20and%20Issues%20by%20Y.V.%20Reddy_.V.%20Reddy.pdf), delivered on May 10, 2002 at National Council of Applied Economic Research, New Delhi
## What are Forex Reserves?
1. The accepted definition (IMF) of foreign exchange reserves includes external assets that are readily available to and controlled by monetary authorities for:
1. direct financing of payments imbalances,
2. for indirectly regulating the magnitude of such imbalances through intervention in foreign exchange markets to affect the currency exchange rate (*maintain stability in the value of the exchange rate*),
3. and/or for other purposes.
2. To meet this definition, reserve assets need to be liquid or marketable foreign currency assets that are under the effective control of, or “useable” by, the reserve manager and held in the form of convertible foreign currency claims on non-residents.
3. The management of the foreign exchange reserves is typically the preserve of the central bank or the monetary authority of the country.
4. In India, under the RBI Act, 1934, the Reserve Bank of India has been entrusted with the responsibility of managing the country’s foreign exchange reserves.
5. The Reserve Bank of India acts as custodian of foreign exchange on behalf of the Union Government of India.
6. The legal provisions governing management of forex reserves are set out in the RBI Act and Foreign Exchange Management Act, 1999 (Act 42 of 1999)
7. Stabilisation Funds and Sovereign Wealth Funds (SWFs) that are to be considered separately from the foreign exchange reserves.
8. The word “reserves” refer to both forex reserves in the form of gold, foriegn currency assets, etc and domestic (rupee) reserves in the form of bank reserves.
## Objectives of reserve management - RBI Act
1. ==The objective of reserve management in India could be found in the RBI Act, where the relevant part of the preamble reads as ‘to use the currency system to the country’s advantage and with a view to securing monetary stability’. ==
2. It may be interpreted to hold that monetary stability means internal as well as external stability; implying stable exchange rate as the overall objective of the reserve management policy.
1. For this, RBI also has to keep a hawk-eye on sources of accretion.
2. **Indian case:** The reserves accretion are driven by capital account surplus and not due to current account surplus, broadly implying that capital inflows are higher than what can be normally absorbed in the domestic economy, that is net capital flows have remained much larger than the current account deficit in India.
3. Thus, in case the reserve accumulation is due to large capital flows, the total stock as well as flow in each category would be relevant for reserve management.
3. While internal stability implies that reserve management cannot be isolated from domestic macroeconomic stability and economic growth, the phrase ‘to use the currency system to the country’s advantage’ implies that maximum gains for the country as a whole or economy in general could be derived in the process of reserve management.
4. This not only provides for considerable flexibility to reserve management practice, but also warrants a very dynamic view of what the country needs and how best to meet the requirements.
5. In other words, the financial return or trade off between financial costs and benefits of holding and maintaining reserves is not the only or the predominant objective in management of reserves.
## Why hold forex reserves? (Motives)
1. Foreign exchange can be held for transaction, speculation or as a precautionary motive.
1. transaction - private banks have a transaction motive and handle trade-related currency needs.
2. speculation - individuals/corporates can have a speculative motive.
3. precautionary - Central banks have a precautionary motive for holding foreign reserves as they provide a *last resort stock of foreign currency* for unpredictable flows (during shocks or emergencies). They keep the official reserves as a ‘war chest’. They act like substitute for capital flows.
1. It can be positively related, like the demand for money, can be positively related to wealth (wealthier a nation, higher the reserves) and the cost of covering unplanned deficit (higher the trade deficit, higher the precautionary demand for reserves) and negatively related to the return from alternative assets (higher the returns from other assets, higher the opportunity costs of holding reserves and so lower the lower the precautionary demand for it).
4. But the country benefits if central bank holds reserves for transaction motives like supplying foreign exchange in times of volatility to ensure stability, and as a war-chest for crises.
2. Both govt. and monetary authority have different objectives - *Thus the objective of holding reserve assets would be influenced by the reconciliation of objectives of the above two.*
3. Forex reserves could be defined as assets of central bank (monetary authority) as the custodian, or of sovereign government as the principal.
1. For the RBI (monetary authority), the motives for holding reserves may be monetary policy and financial stability objectives .
1. maintain or [[Measures to stabilise the exchange market#Summary of Measures|manage]] the exchange rate (that is reducing volatility in foreign exchange markets) *to ensure value of rupee is aligned with fundamentals*,
1. Higher the reserves, higher the deterrence against the speculative attack, and lower the sovereign risk premium in adverse economic circumstances (Kohlscheen 2020). In other words, reserves help to keep exchange rate stable in the events of international money and capital flows.
2. intervening in forex markets to achieve the balance between demand for and supply of foreign currencies - *like dollar sales in offshore (NDF) in times of volatility*,
3. maintaining confidence in monetary and exchange rate policies,
1. Reserves give central banks the ==independence to maintain their chosen monetary policy stance==, without being forced to respond directly to foreign exchange market pressures.
2. If the currency is under depreciation pressure (possibly due to capital outflows), the central bank can sell forex reserves to stabilize the currency without needing to raise interest rates further.
3. If the currency is appreciating too much, the bank can buy foreign currency to manage exchange rate expectations and support exports, without having to lower rates.
4. maintaining (or limiting external vulnerability) foreign currency liquidity to absorb shocks during times of crisis (being prepared for contingencies) including national disasters or emergencies;
1. In the aftermath of the Asian crises, it was widely perceived, supported by academic research and commentators, that large reserves were needed by emerging market economies (EMEs) to withstand any crisis and, to some extent, it was a reflection of the lack of confidence in the international financial architecture.
5. providing confidence to the markets especially credit rating agencies that external obligations can always be met, thus reducing the overall costs at which forex resources are available to all the market participants, and
1. just a digression - A borrowing by govt. in foreign currency can also create a benchmark rate and allow other market participants of India to borrow cheaper in FCY overseas, especially when global interest rates are low.
2. But when the credit rating reaches appropriate investment grade, addition to reserves may not lead to further improvement in the credit rating.
3. Also, in any country risk analysis by the rating agencies and other institutions, the level of reserves generally has high weights than the cost of it.
6. incidentally adding to the comfort of the market participants, by demonstrating the backing of domestic currency by external assets.
It is necessary to recognise that, as in the case of costs, there are difficulties in computing the benefits too.
2. For government, the motives may beyond that of RBI's like broader fiscal or national objectives.
1. servicing sovereign external debt,
2. paying for imports of essential goods,
3. or even providing income (interest earnings).
3. Thus the objective of holding reserve assets would be influenced by the reconciliation of objectives of the above two.
4. . In India, by statute, the RBI is the custodian of the FX reserves and the reserves are held for
- **precautionary** and transaction motives keeping in view the aggregate of national interests,
- for intervention to ensure balance between demand for and supply of foreign currencies,
- and most importantly, to preserve confidence in the country’s ability to carry out external transactions (Reddy, 2002).
5. Why not hold reserves/costs of holdings reserves?
1. There has been much discussion post-crisis on the cost effectiveness of self-insurance. The main refrain has been that accumulation of reserves by EMEs as a safety-net entails domestic costs while also leading to global imbalances.
6. Sources of Reserves - A very important factor
1. Be that as it may, in evaluating the level of reserves and the quantum of self insurance, it is important to distinguish between countries whose reserves are a consequence of current account surpluses and countries with current account deficits whose reserves are a result of capital inflows in excess of their economy’s absorptive capacity. India falls in the latter category.
2. <span style="background-color: #fff9ae">Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals as compared with countries with current account surpluses.</span>
7. *This also explains that the financial return or trade off between financial costs and benefits of holding and maintaining reserves is not the only or the predominant objective in management of reserves.*
### Few Studies
1. Few studies here why countries accumulate or de-cumulate international reserves:: [^9]
1. Aizenman (forthcoming), Eichengreen (2011), Chinn and Frankel (2008), and Dooley, Folkerts-Landau and Garber (2004) debate the angles of mercantilism, international insurance, or some variant of infant industry protection through undervalued currencies.
2. Rodrik (2006) argues that holding such reserves comes at a high social cost.
3. Obstfeld, Shambaugh and Taylor (2009), and Aizenman and Sun (2009) address the dynamics of such international reserves during the Great Recession.
4. Having foreign exchange reserves helps a country in different ways, for some countries, it mainly reduces vulnerability to international financial shocks; for others, it mainly helps stabilize their exchange rate; and in many cases, it does both to varying degrees.
5. But there are also growth consequences if the goal of reserve accumulation is tied to the goal currency undervaluation. It is more typically and historically associated with infant industry protection arguments.
## Evolution of Reserve Management
1. Until the BoP crisis of 1991, India’s approach was *to maintain an appropriate level of import* cover defined in terms of number of months of imports equivalent to reserves.
2. **1993-94:** The High Level Committee on Balance of Payments (Chairman: Dr. C. Rangarajan) in 1993 shifted RBI’s reserve management philosophy, from focusing mainly on import cover, to using reserves as a tool for exchange rate and external sector stability.
1. The committee, the factors that are to be taken into consideration in **determining the desirable level of reserves.** The focus was payment obligations in addition to the level of imports.
1. ==payment obligations== - the need to ensure a reasonable level of confidence in the international financial and trading communities about the capacity of the country to honour its obligations like transactions and payment liabilities from discharging short-term debt obligations or servicing of medium-term debt, both interest and principal, import cover of three months, and maintain trade and financial flows;
2. ==volatility in capital or trade flows== - the need to take care of the seasonal factors in any balance of payments transaction with reference to the possible uncertainties in the monsoon conditions of India;
3. ==speculation== - the amount of foreign currency reserves required to counter speculative tendencies or anticipatory actions amongst players in the foreign exchange market;
1. One of the major arguments given in favour of accumulation of reserves is its role as a deterrence against speculative attack on the currency in the event of sudden stops.
2. A speculative attack can cause sharp depreciation, a currency crisis, which necessitates central banks to intervene in the foreign exchange market or to increase domestic interest rates (Glick and Hutchison, 2011) and the currency crisis raises the probability of a banking crisis (Glick and Hutchison, 2001).
3. Higher the level of reserves, higher the deterrence against the speculative attack, and lower the sovereign risk premium in adverse economic circumstances (Kohlscheen 2020).
4. and the capacity to maintain the reserves so that the cost of carrying liquidity is minimal.
3. The introduction of market determined exchange rate also warranted having reserves sufficient to smoothening out the volatility in the exchange rate.
4. **1997-98:** Not just the amount of reserves but the quality of reserves also assume importance.
1. The currency crises in East-Asian countries and the resultant experiences of volatile cross-border capital flows made clear the shift in the pattern of leads and lags in payments/receipts during exchange market uncertainties, and emphasized that besides the size of reserves, the quality of reserves also assume importance.
2. Highlighting this, the Report stated that unencumbered reserve assets (defined as reserve assets net of encumbrances such as forward commitments, lines of credit to domestic entities, guarantees and other contingent liabilities) must be available at any point of time to the authorities for fulfilling various objectives assigned to reserves.
5. **Related Note** - [Exchange Rate Policy](Exchange%20Rate%20Policy.md)
>==Must Read - Article titled *Foreign Exchange Reserves Buffer in Emerging Market Economies: Drivers, Motives and Implications.* in the monthly bulletin of April 2022. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941) | [pdf](RBI_Monthly%20Bulletin_202204_Foreign%20Exchange%20Reserves%20Buffer%20in%20Emerging%20Market%20Economies-%20Drivers,%20Motives%20and%20Implications.pdf)==
## How much reserves are adequate?
1. Basic motives for holding reserves determines the appropriate level of foreign reserves.
2. Here we do following assessments to understand how much reserves are adequate.
1. Qualitative
2. Quantitative (indicators based)
3. Cost of holding reserves
### Qualitative assessment
These are judgement-based or conceptual indicators of reserve adequacy
1. **Have enough reserves to maintain confidence in our ability to provide liquidity.**
1. “A country must hold enough reserves to maintain international confidence in its ability to meet its external payment obligations—imports, short-term debt, and other liabilities.
2. But there is no precise way of defining at what level the confidence factor would be undermined. So judgments must be made on following facts:
1. Once investor or market confidence in a country’s reserves starts falling, it’s very hard to restore. therefore, it’s better to err on the side of holding slightly more reserves.
2. Markets watch changes in reserves more closely than the total stock. So maintaining stability in the trend of reserves matters more than just having a large number.
3. Markets might expect RBI to defend every movement and that would limit policy flexibility like a straightjacket situation. Thus RBI should show it is ready to use reserves to stabilize the market if needed, but without promising to always intervene.
2. **No level can be adequate in all situations**
1. An adequacy of reserves cannot be judged by size alone because there is no single level of foreign exchange reserves that can be considered adequate in all situations.
2. A large stock may give comfort against certain weaknesses, such as a fragile financial sector or high public debt, but not if the current account is unsustainable or the exchange rate overvalued.
3. A large stock of reserves may provide comfort against weaknesses such as a fragile financial sector or high public debt.
4. In some cases, excessive reserves may even encourage complacency in financial and fiscal policies.
3. **A level of reserves where a drawdown by residents through capital flight is also considered**
1. Many indicators of adequacy of reserves do, to a significant extent, capture the potential for drawdown by non-residents.
2. But the factors governing drawdown by residents through capital flight are not easily assessed. If even this is considered, then it will give comfort in withstanding drawdown through capital flight, and experience indicates that crisis of confidence in currency often originates among residents.
4. **Adequate to manage the volatility in capital or trade flows**
1. There are also seasonal factors in any balance of payments transaction with reference to the possible uncertainties in the monsoon conditions of India.
2. These timing differences known as _leads and lags (timing of trade payments and receipts) affect supply and demand for foreign exchange.
3. But when such timing differences can be influenced through policy or administrative measures, the need to hold large reserves to manage them becomes lower.
5. **An appropriate level must also consider emergency borrowing facilities from private sector**
1. Instead of holding huge forex reserves, a central bank can arrange contingent credit lines, viz., emergency borrowing facilities, from the private sector like the international commercial banks or financial institutions, which can be accessed when foreign currency is needed.
2. As of now, RBI does not have the legal authority to borrow or draw against external credit lines from the non-official sector.
3. In any case, experience of other countries has not been very satisfactory on this.
6. **Reserves must be enough to counter speculation or market sentiment
1. Where there is lumpiness in demand and supply as is the case in India, the forex reserves have to be used for meeting the temporary mismatches in forex markets. In such a situation, the incremental changes in the level of forex reserves may also be correspondingly large. There is a tendency among the analysts and media to react negatively to erosion in a more intensive way and positively to addition to reserves in a less intensive way.
2. Thus some amount of foreign currency reserves are also required to counter speculative tendencies or anticipatory actions amongst players in the foreign exchange market.
3. A higher level of reserves may possibly give greater scope for changes by making them appear marginal.
7. **Good bilateral or multilateral relations may lower the adequate level of reserves**
1. How much forex resources may be readily accessed in case of difficulties, though on a judgemental basis, can be assessed based on bilateral or multilateral relations at government level.
2. In other words, geopolitical factors do give different levels of comfort of ready availability of forex resources from official sector through bilateral or multilateral channels.
3. But such access depends upon the perceptions of the economy in the market place as well as among governments or the official sector. This perception is subject to change and hence India has to constantly make and review its assessment of such access
4. But, of course, in the face of BoP issues, the first line of defence is country’s own resources, such as forex reserves, followed by other options such as swaps - both bilateral and from RFAs - and market borrowings which are more likely to be preferred to meet BoP financing needs, as these financing options do not have the stigma that is attached to borrowing from the IMF. Finally, countries tend to resort to IMF loans and/or official bilateral loans when other options do not appear to be feasible. [^4]
8. **A level where the cost of carrying liquidity is minimal.**
1. An appropriate level of reserves can be one which is enough to handle crisis, but not so much that maintaining them becomes expensive.
9. Ultimately, it is difficult to determine how much weight to assign to these judgemental, non-economic, and non-market considerations in assessing reserve adequacy.
### Quantitative indicators:
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2. Here we discuss four sets of indicators to assess adequacy of reserves, but none of them itself fully explain adequacy.
3. In other words, we can assess the level of reserves in terms of the volume of expected outflows which can be covered by reserves.
1. _money based indicators_ - *reserves to broad money*
1. The *reserves (net foreign exchange assets-NFA)-to-broad money (M3)* ratio or *NFA-to-currency in circulation ratio* shows how much foreign exchange the RBI has to back potential conversions of rupees into dollars by the residents if they suddenly lost confidence in the rupee. The latter ratio tells us *how much of the RBI’s issued currency is backed by foreign assets while latter is *total rupee money supply available to the economy (public) for spending.*
2. Hence a sharply rising NFA/currency ratio during the period of the inflow gives an element of comfort to the foreign investor as it indicates that domestic currency expansion has been moderated and when the *outflow starts* due to various [[Measures to stabilise the exchange market#Major causes of depreciation of Rupee|factors]], there will be sufficient foreign assets to meet the currency contraction (reduction in domestic money supply).*
3. It is pertinent to mention that up to 1956 under the Reserve Bank of India Act, 1934, holdings of foreign securities had to be equivalent to at least 40 per cent of the issue of currency.
4. While a sizable money stock in relation to reserves, _prima facie_, looks risky in theory and suggests a large potential for capital flight out of money, but where money demand is stable and high confidence in domestic currency, a low ratio is normal and not a sign of weakness.
5. M3 = Money easily spendable by public \+ institutional rupee deposits with RBI
= Cash/currency with public (currency in circulation - cash with banks)
\+ Net demand deposits (current+ savings)
\+ Net time deposits with banks
\+ Other (quasi-government, other central banks, govt., IMF) rupee deposits with RBI.
*Here "Net" means excluding inter-bank deposits.*
6. Data release - Table titled *Components of Money Stock* [Handbook of Statistics on Indian Economy](https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy) which is released annually.
2. *trade based indicators– reserve cover of imports
1. ==They are import-based indicators defined in terms of reserves in months of imports, and tells a number of months a country can continue to support its current level of imports if all other inflows and outflows cease. ==
2. In other words, it suggests to hold reserves in proportion to the size and openness of the economy.
3. As the measure focuses on current account, it is relevant for small economies, which have limited access and vulnerabilities to capital markets. For substantially open economies with a sizable capital account, the import cover measure may not be appropriate.
3. _debt based indicators - short term debt to reserves by remaining maturity (reserve cover of short-term debt)
1. It is measure of all debt repayments to non-residents over the coming year. Now [External Debt](External%20Debt-India.md) can be separated into short-term and long-term debt (by residual maturity).
2. They appeared with episodes of international crises, as a better indicator of identifying financial crises.
3. It constitutes a useful measure of how quickly a country would be forced to adjust with adverse developments in international capital markets.
4. Thus it is the single most important indicator of reserve adequacy in countries with *significant but uncertain access to capital markets.*
5. Other indicators are with respect to external debt are:
1. short-term debt (original maturity) to reserves,
2. reserves to total debt,
3. short-term debt (residual maturity) to total debt,
1. This is useful in the context of mobile capital flows.
4. debt service ratio – ratio of gross external debt (principal and interest) to external current receipts *(exports)*.
The IMF defines debt service ratio as the ratio of external debt service payments of principal and interest on long-term and short-term debt to *exports of goods and services for any one year* (External Debt Statistics: Guide for Compilers and Users, 2003)
5. concessional debt to total debt [^1]
1. Concessionality in external loans indicates the softer terms and conditions of loans in relation to the prevailing market conditions. Concessionality could be reflected in lower rate of interest, longer repayment/grace period, lesser/non-charging of commitment charges, etc. Concessionality is measured by the difference between the face value of a credit and the sum of the discounted future debt service payments to be made by the borrower.
4. ==*a combination of point 2 and 3, that is current-capital accounts== (reserve cover of CAD and short-term debt)
1. Of particular interest, is the Guidotti Rule, which has received wide appreciation from many central bankers including Alan Greenspan, which postulates that the ratio of short-term foreign liabilities (that is short term debt along (assuming no rollover) with a projected current account deficit (or another measure of expected borrowing).
2. It serves useful an indicator of how long a country can sustain external imbalance without resorting to foreign borrowing.
3. ==As a matter of practice, the Guidotti Rule suggests that the countries should hold external assets sufficient to ensure that they could live without access to new foreign borrowings for up to twelve months.==
4. They act as the meaningful measure of _liquidity risks_.
5. *a combined metric of reserve adequacy (point 1 and 3)*
1. Wijnholds and Kapteyn (2001) suggested reserves to be adequate to cover short-term external debt and an adjusted broad money where *the adjustment depends upon the exchange rate regime and country risk.*
1. So countries with higher perceived crisis risk require a bigger reserve buffer.
2. A pegged exchange-rate regime requires higher reserves than a flexible regime.
6. The Guidotti-Greenspan rule suggests an ideal level of reserves to be equal to short-term external debt having maturity of up to one-year.
7. The IMF’s analytical framework uses an assessing reserve adequacy (ARA) metric[2](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941#F2) which includes some of the above indicators.
1. These indicators encompass multiple channels of market pressure and a broader set of risks that an EME can potentially face. The ARA metric is a composite value which takes into account the short-term external debt, broad money, export income coverage and other liabilities.
2. According to the IMF, the ratio of reserves to ARA metric value between 1-1.5 is considered as an adequate level of reserves
8. A related concept here is GDP-based ratios (like CAD/GDP, NFA-to-GPD, external liabilities/GDP, per capita income in USD, etc.) are also used to identify long-term or structural vulnerability of the country.
==But assessing the reserve adequacy in EMEs based on the data of stable periods of time may not be appropriate given the susceptibility of EMEs to global financial developments such as monetary policy actions in major advanced economies and the dynamics of commodity prices like gold and crude oil (Reddy, 2006).==
From the Report of the High Level Committee on Balance of Payments, culminating in Governor Jalan’s idea of the combination of global uncertainties, domestic economy and national security considerations in determining liquidity at risk, the Indian approach to determining adequacy of forex reserves has been evolving over the past few years.
### Costs
A major question on the level of reserves relates to the scope for measuring overall economic costs along with the benefits of holding reserves.
1. **Marginal social costs, or opportunity costs**
1. They are useful for analytical purposes, computation is difficult though assessments are not impossible.
2. **Direct financial cost**
1. The direct financial cost of holding reserves can be assumed to be the difference between interest paid on external debt and returns (yields on U.S. Treasury Bills) on external assets in reserves. ^d51759
1. *But higher the reserves, lower the perceived risk, and lower the interest cost of external debt:* The correlation of interest rate on external commercial borrowings (ECBs) proxied by weighted average margin over LIBOR (margin over 6-month LIBOR or reference rate for floating rate loans) with reserve cover of imports during 2004-05 to 2020-21 was negative at -0.48 (p-value, 0.05). This implies that adequate level of reserves are accompanied with low cost of foreign currency borrowings [^7].
2. *Higher the reserves, higher the deterrence against the speculative attack*, and lower the sovereign risk premium in adverse economic circumstances (Kohlscheen 2020).
3. Yeyati (2008) argues that reduction in risk premia due to forex reserves through its effects on sovereign credit rating implies lower effective cost of holding reserves [^7].
4. *Higher the reserves, lower the forward premium, cheaper the future dollars* - So not just the cost of foreign currency borrowing, but also the forward premium which reflects the future price of a currency, and serves as a benchmark for hedging cost for corporates with foreign currency exposures (e.g., imports and/or foreign borrowings) also reduces. In the Indian context, there is a negative relationship between forward premia and the reserve cover of imports ([Chart 8](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941#C8)).
1. However, forex interventions in the form of forward purchases are found to be associated with increase in forward premia (RBI, 2021).
2. *Costs must be compared with benefits:* But such costs have to be treated as insurance premium to assure and maintain confidence in the availability of liquidity. The benefits of such a premium are not merely in terms of warding off risks but also in terms of better credit rating and finer spreads that many private participants may get while contracting debt. The costs of comfort level in reserves are often met by some benefits, but both are difficult to measure, in financial or economic, and in quantitative terms.
3. Also such calculations of costs of holding reserves by comparing return on forex reserve with costs of external debt may imply that addition to reserves has been made by contracting additional external debt.. But in case of some countries, it is possible that addition to reserves may happen while keeping the overall level of external debt almost constant.
4. ==In 2014, Rajan said, “We earn next to nothing for the foreign reserves we hold. We are financing another country when we have a significant financing need.==
1. So when RBI purchases foreign exchange it sells rupees and expands money supply, which supports the growth and investment in India. In other words, it covers the [savings gap (I-G)](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=542). But RBI also loses the higher yield which it could earn on its holdings of domestic assets.
2. RBI then invests the foreign currencies in foreign govt. securities which earn very low returns. Therefore, India effectively finances richer countries, even though it needs capital itself. This is a carry cost of holding reserves.
3. **Social costs:**
1. Social cost of reserves, from the national stand point, that is equal to the spread between the private sector's cost of short-term borrowing abroad and the yield that the central bank earns on its liquid foreign assets.
2. But there are difficulties in calculating precisely quasi-fiscal costs or other costs on this account.
4. **These analysis must be done with a medium term view:**
1. All the cost and benefits analysis should be done with a medium-term view. . For example, in case there is uncertainty about capacity to acquire needed reserves at a later date, a country may prefer to acquire them sooner than later.
5. **Costs should also consider the open market operations:**
1. In brief, the costs and benefits *arise as much out of open market operations of the central bank* as out of management of levels of reserves.
2. Example-What is the costs of not adding to reserves through open market operations at a time when the capital flows are strong?
3. In other words, the costs and benefits of forex reserves may have something to do with the open market operations, both in money and forex markets than merely the level itself.
6. **Cost of carrying reserves or Quasi-Fiscal cost**
1. A simple method of calculating net cost of carrying reserves to the central bank is the difference between the interest rate on domestic securities and the rate of return earned on the foreign exchange reserves adjusted for any exchange rate change. The magnitude of the cost, which is often difficult to estimate, varies with the extent of sterilisation and the yield differentials.
2. *Positive or negative cost*
1. In countries where local interest rates are well above international levels, such carrying costs could be positive, while if the reverse is true such carrying costs could be negative.
2. inherent cyclical nature of interest rates, such negative carrying cost could reverse over a period of time.
3. India incurs negative cost.
4. But such hypothetical cost calculations do not capture capital gains or losses.
3. These are termed "quasi-fiscal" costs in the literature since the costs to the central bank are passed on to the sovereign through a lower transfer of profits
4. Also, if the level of reserves is considered to be significantly in the high comfort zone, it may be possible to add greater weight to return on forex assets than on liquidity thus reducing net costs if any, of holding reserves.
### Comfort
1. It may be useful, for practical purposes, to view the adequacy of reserves in terms of degree of comfort they offer at a given time.
2. Certainly, at a very low level of reserves, which we in India had in the early 1990s, the degree of comfort was very low, and with rising level of reserves, the comfort also increases. [^5]
3. Several factors influence the comfort level in regard to reserves like:
1. apart from the exchange rate regime,
2. vulnerability to the real sector shocks,
3. strength of the fiscal and financial sectors,
4. current account balance,
5. the changing composition of capital flows,
6. a medium-term view of growth prospects encompassing business cycles, etc
4. As the reserves level keeps on rising to reach a level higher than the "comfort zone", then at some point, a portion of the reserves would cease to be strictly ‘foreign exchange reserves’ and could be characterized as a corpus of funds available for deployment in a higher risk-return portfolio
5. relative emphasis on safety, liquidity and return keeps changing with the degree of comfort at a given level of reserves.
6. The comfort level of reserves should not be viewed with respect to the current situation alone but should also reckon the assessment of the emerging risk.
7. To summarise, several factors decide the the comfortable level of reserves and the relative weights assigned to safety, liquidity and return. When, how and through whom should the search for higher returns be pursued, depending upon the level of comfort, is a matter of convenience and context, and options, as appropriate, should always be kept open.
### Source of Reserves
1. This is another decisive factor in measuring adequacy of reserves.
2. In evaluating the level of reserves and the quantum of self insurance, it is important to distinguish between countries whose reserves are a consequence of current account surpluses and countries with current account deficits whose reserves are a result of capital inflows in excess of their economy’s absorptive capacity. India falls in the latter category.
2. <span style="background-color: #FFF2D7">Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals as compared with countries with current account surpluses.</span>
7. This also explains that the financial return or trade off between financial costs and benefits of holding and maintaining reserves is not the only or the predominant objective in management of reserves.
### How much reserves does RBI aim to hold?
1. Although India does not have a deliberate strategy of building up reserves for self insurance, our reserves got built up as a result of our relatively flexible exchange rate policy. The reserves so built up have been used to contain volatility in the event of capital flow reversals. [^11]
2. ==In a regime of [[Managed vs Market-determined rates|free float]], it could be argued that there is really no need for reserves.== If demand for foreign exchange is higher than supply, the local currency will weaken but will settle at equilibrate demand and supply over time.
1. Till 1991, RBI’s focus was to ensure enough reserves to cover the imports. It had relied heavily on multilateral (like IMF) and bilateral assistance, ECBs (to some extent) and NRI deposits, to finance the CAD.
2. **In 1993,** a Committee on Balance of Payments crisis headed by Dr C. Rangarajan was formed to suggest new approach in the management of foreign exchange reserves. It asked to maintain reserves keeping in mind the country's total external debt, so that there is enough confidence in investors that India can repay all its foreign borrowings. This would help to control speculative movements in value of financial assets.
3. **In 1997**, a [committee](RBI_Report_1997_Committee%20on%20Capital%20Account%20Convertibility%20(1997)_Chairman-S.S.Tarapore_Tarapore%20Committee-1.pdf) headed by Shri S. S. Tarapore, on capital account convertibility recommended various (four) measures to understand how much reserves could be adequate for India. Along with trade-based factors, the report suggested money and debt-based factors as measures for adequacy of reserves.
4. Few other [measures](RBI_Monthly_Bulletin_Article_20040311_%20Report%20on%20Foreign%20Exchange%20Reserves.pdf) that has influenced the assessment of reserve adequacy
1. One such measure requires that the usable foreign exchange reserves should exceed scheduled amortisation of foreign currency debts (assuming no rollovers) during the following year.
2. The other one is based on a 'Liquidity at Risk' rule that takes into account the foreseeable risks that a country could face. This approach requires that a country's foreign exchange liquidity position could be calculated under a range of possible outcomes for relevant financial variables, such as, exchange rates, commodity prices, credit spreads etc. In simple words, it required RBI to calculate if it could cover the foreign currency needs even under extreme changes in exchange rates, commodity prices, or credit conditions
3. Reserve Bank of India has done exercises based on intuition and risk models in order to estimate 'Liquidity at Risk (LAR)' of the reserves.
5. [July 2006](RBI_Group-Committee_2006_Committee%20on%20Fuller%20Capital%20Account%20Convertibility_2006_Chairman-S.S.Tarapore_Tarapore%20Committee-2.pdf#page=43&selection=15,0,15,20) - Committee on Fuller Capital Account Convertibility (Chairman: Shri S.S.Tarapore, July 2006) also held similar views
6. In July 2006, a similar committee was formed on Fuller Capital Account Convertibility (FCAC) headed by Chairman S. S. Tarapore
7. The approach included changing components of India’s Balance of Payments and the liquidity risk associated with different kinds of flows. RBI also made efforts to understand how much reserve is enough for the country
>Further Reading:
>1. Speech by Y.V. Reddy on August 15, 1997, titled *Exchange Rate Management : Dilemmas*. \[Inaugural Address\]. XI<sup>th</sup> National Assembly Forex Association of India at Hotel Cidade De Goa. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=231) | [pdf](RBI_Speech_19970815_Exchange%20Rate%20Management%20-%20Dilemmas_Y.V.Reddy%20.pdf)
>2. [Adequacy of Reserves](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=194&selection=13,0,13,20) in History of The Reserve Bank of India (1997-2008)-Volume V
>3. [Box VI.1-Adequacy of Reserves](RBI_Annual_Annual%20Report_2001.pdf) in RBI's Annual_Annual Report-2001
>4. Foreign Exchange Reserves Buffer in Emerging Market Economies: Drivers, Motives and Implications in Monthly Bulletin of April, 2022. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941) | [pdf](RBI_Monthly%20Bulletin_202204_Foreign%20Exchange%20Reserves%20Buffer%20in%20Emerging%20Market%20Economies-%20Drivers,%20Motives%20and%20Implications.pdf)
## Issues with Management
1. RBI has to operate in consultations with government - *can be an issue sometimes*
1. Sound legislative framework and institutional arrangements are fully in place, with RBI being the owner and custodian of reserves, but operating in consultations with government as necessary.
2. Example- there is close co-ordination between the RBI and Government with regard to magnitudes, composition and maturities of external debt, both in official and private sector. It clearly enhances the effectiveness of reserve management.
2. RBI does not have the legal authority to borrow or draw against external credit lines from the non-official sector.
1. Only official sources like other central banks, the IMF, or sovereign [[Bilateral, Multilateral Swaps, LoC, Liquidity Arrangements|arrangements]] are allowed.
3. Until 1977, Legal limitations on active management of gold reserves
1. RBI holds gold as part of India’s forex reserves.
2. But laws and internal rules make it hard for RBI to actively trade, lease, or use gold to earn income unlike some other central banks. RBI can mostly just hold it passively.
3. Deep seated conservatism (too cautious) is reflected in hesitancy to alter the legislative framework.
4. So should those restrictions be relaxed to allow more flexible or profitable management of monetary gold so that RBI can earn better returns?
4. A co-ordination between monetary, exchange rate and reserve management is extremely important.
1. RBI ensures this operationally and articulated publicly through its communications, in a comprehensive manner.
5. **Related Notes:**
1. [WSS - Weekly Forex Reserves](WSS%20-%20Weekly%20Forex%20Reserves.md)
2. [Half-Yearly Report of Forex Reserves](Half-Yearly%20Report%20of%20Forex%20Reserves.md)
## Drivers of forex reserves
Foreign exchange reserves in EMEs in the long-run are found to be determined by the current account balance, interest rate differentials, average propensity to import and real effective exchange rate (Sooriyan, 2017).
1. In case of India, these are important ==factors or events over the last few decades:== that have contributed to the comfortable accretion to reserves.
1. **The liberalisation of imports of gold**
1. This step has brought a large segment of unofficial imports and forex market into the official sector and reduced large transaction costs incurred in foreign exchange.
2. In fact, meaningful development of forex markets was enabled by this measure and consequently effectiveness of intervention in forex markets enhanced, **helping RBI preserve reserves**.
2. **More capacity to conduct OMO (sterlisation) helped RBI absorb capital flows into the reserves:**
1. The abolition of automatic monetization (since April 1, 1997), and allowing the marketization (selling bonds in the open market) of Government borrowings enhanced RBI's capacity to conduct open market operations to sterilize the capital inflows. In other words, large capital flows could be absorbed into the forex reserves without seriously imparting volatility in forex or money markets because of *simultaneous actions* taken to develop these markets.
1. After 1997, government started borrowing by selling bonds in the open market (marketization of debt). This created a proper stock of trade-able government securities** in the market, which could be bought and sold by the RBI to conduct open market operations effectively.
2. Conversion of non-marketable government securities (a_d-hoc_ treasury bills) into marketable ones
1. By 2003-04, RBI converted non-marketable government securities (special securities) issued to them in lieu of ad-hoc_ treasury bills into marketable ones by appropriate arrangements with government, to enhance its capacity to conduct open market operations.
3. Both the moves explain the importance of state of financial markets in the management of capital flows and forex reserves
3. **A far lower level of current account deficit (CAD)**
1. In case of Russia, reserves are built out of current account surplus. China, Korea and Taiwan, the surplus, is in both current and capital account.
2. For countries like India, the reserves accretion is driven more by capital account surplus and not due to current account surplus, broadly implying that capital inflow is more than what could be normally absorbed in the domestic economy —net capital flows have remained much larger than the current account deficit in India.
3. A sustainable level could be some percentage of the Gross Domestic Product (GDP) each year
4. A country can still have higher CAD if it is financed by increase in the size of capital flows but it will not result in accretion of reserves of the central bank.
5. In other words, policy coordination has to be put in place to synchronise the sustainable current account deficit with sustainable economic growth that attracts stable and sufficient capital flows) and maintain adequate forex reserves
4. **Continued inflow of capital especially of non-debt creating flows**
1. From a policy perspective, there are two facets of this coordination. To mobilise capital flows of this order, international investor confidence is critical. In order to maintain international confidence in the ability of the country’s payment position, accumulation of reserves at a higher level is an important prerequisite.
2. Then these [[Capital Flows - Account & Management|capital flows]] of high order also have absorbed and its associated monetary impact has to be managed
2. In general, these factors drive change in reserves.
1. **From the operational perspective, they are**
2. central bank interventions,
3. income on reserve assets and
4. allocation of SDRs by the IMF could be the major sources of accumulation of official foreign exchange reserves.
2. **From the economic point of view, reserve accretion can be decomposed into contribution of** [^7]
1. balance of payments (capital account+current account)
1. A larger chunk of change in stock of reserves is driven by balance of payments;
1. a current account surplus-a phenomenon of higher receipts than payments from goods and services trade, transfers and investment income.
1. Reserve accumulation in current account surplus (like Japan) countries indicates excess of domestic savings over investment and the resultant capital outflows due to interest rate differentials.
2. For example, reserve accumulation in China, Russia and Thailand occurs mainly due to current account surpluses.
3. Such reserves built-up also indicates the nation’s income earned from foreign countries
2. a capital account surplus reflecting an increase in foreign liabilities in the form of foreign investment and loans,
1. Reserve accumulation in countries with current account deficit indicates excess of capital flows over CAD or inability to absorb capital inflows. India, Indonesia and Turkey are such countries where it is usually driven by capital account surpluses.
2. It also indicates net incurrence of liabilities.
3. During the last 20 years (from 2022-2002), India had current account surplus only in four years i.e., 2001-02 to 2003-04 and in 2020-21.
4. Japan has high current account surplus but very low rates. This is not a norm. They are independent factors. Countries like Russia, Norway have high current account surplus and high interest rates. US, UK have high current account deficit but low rates.
2. and valuation effect (dollar terms).
1. As reserves are held mainly in the form of foreign currency assets and gold, their value is influenced by movement in exchange rate (vis-à-vis the currencies in which reserves are denominated) and the price of gold.
2. Increase in gold price and exchange rate depreciation of the US dollar against major currencies (fall in value of US dollar against Euro, Japanese yen, etc.) lead to valuation gains resulting into increases in stock of reserves.
3. The valuation gains/ losses usually constitute a smaller portion of change in stock of reserves and can be temporary as gains in a year/ month may be followed by losses in the next period and vice versa.
2. Thus, reserve accumulation is broadly a reflection of long-term surplus in BoP arising from current account and/or capital account.
3. This table shows the [Sources of Accretion to Foreign Exchange Reserves](https://rbi.org.in/Scripts/PublicationsView.aspx?id=23437#I22) in half-yearly report of foreign exchange reserves.
### Fluctuations in reserves:
1. In the context of "drivers of reservers", we can also review the study [India’s Foreign Exchange Reserves in High Volatility Episodes - An Empirical Assessment](RBI_Monthly_Bulletin_Article_20240423_India’s%20Foreign%20Exchange%20Reserves%20in%20High%20Volatility%20Episodes%20-%20An%20Empirical%20Assessment.pdf) by Saurabh Nath, Dipak R. Chaudhari, Vikram Rajput and Gaurav Tiwari published in April 2024 edition of RBI Bulletin, where they have analyzed the trend of India’s foreign exchange reserves during major high volatility episodes viz.,
1. Asian Crisis (1997)
2. Global Financial Crisis,
3. Eurozone debt crisis,
4. Taper Tantrum,
5. US-China trade war,
6. the recent Russia-Ukraine conflict and
7. US Fed monetary tightening.
2. During these episodes, major underlying factors impacting the variation in FX reserves such as US Dollar Index (DXY), oil prices, foreign portfolio flows, US financial conditions and market volatility were seen. ==The report observed that reserves, during the recent Russia-Ukraine conflict and US Fed tightening episode, faced strong headwinds from trends in DXY, oil prices, foreign portfolio outflows and tight US financial conditions, with the severity of these factors being the highest vis-à-vis the previous high volatility episodes.
3. Along with returns, it also focuses on the safety and liquidity of its reserves. India’s forex reserves have grown from. Due to increased uncertainty in currency and bond markets, it is faced with a **grinding challenge to safeguard the value of reserves.** It tries to maintain market’s confidence in its policies to ensure stability in value of financial assets like bonds, stocks and therefore Rupee. It uses various opportunities to increases its reserves.
4. There are many undesirable situations which are “external or foreign” in nature. RBI tries to maintain a very liquid foreign currency reserve so that it can use them to stabilise forex markets in such times. Natural disasters and emergencies make Rupee vulnerable to high volatility. It focuses on managing external debt so that market participants are confident
5. Aftermath of Asian Crisis
1. Since the Asian crisis (1997) and by end of December 20, foreign exchange reserve with central banks in Asian countries increased suddenly and significantly to prepare for future currency crises.
2. In times of capital flows, central banks [increase their ](IMF_Chapter%2010-India-Guidelines%20for%20Foreign%20Exchange%20Reserve%20Management-Accompanying%20Document%20and%20Case%20Studies.pdf) holding foreign exchange assets by creation of reserve money, so they can finance external payments imbalances through intervention, and provide confidence to the market about stability in exchange rate.
3. At the end of December 2014, all emerging and developing countries account for approximately 67.37% and emerging and developing countries Asian countries accounts for approximately 39.34% of world's total foreign exchange reserves.
6. **Related Notes** - [Measures to stabilise the exchange market](Measures%20to%20stabilise%20the%20exchange%20market.md) (in times of crisis of outflows)
## Deployment/levels of Reserves
1. As a custodian, the central bank’s main objectives are to ensure safety, liquidity and optimization of returns on deployment of reserves. They form the *operational principles guiding how reserves are managed
1. But until 1993, huge portions of India’s foreign currency inflows and outflows passed directly through RBI, and it made sense for RBI to invest its reserves in a way that matched India’s external debt/liability structure so that it could meet any payment obligation smoothly.
2. . The RBI Act stipulates the investment categories in which RBI is permitted to deploy its reserves.
1. They are generally deployed in low-risk liquid assets like debt instruments representing sovereign/sovereign-guaranteed liability, in deposits with other central banks, Bank for International Settlements (BIS), supra-nationals and with highly rated foreign commercial banks, and gold.
2. the Reserve Bank follows appropriate prudential norms in the management of the foreign exchange reserves.
3. One crucial area in the process of investment of the foreign currency assets in the overseas markets, relates to the risk involved in the process viz. credit risk, market risk and operational risk, though there is no set formula to meet all situations.
4. In deploying reserves, attention is paid to the currency composition, duration and instruments.
5. The approach can be described as one of a 'loss minimisation strategy' as an income maximisation strategy involves serious risks which a Central Bank had best avoid. [^6]
6. The rationale of the policy is clearly one of observing strong prudential norms and eschewing speculative positions. Also the current law does not allow RBI for making full use of market instruments which have developed in more recent years.
3. It also consults the Central Government on important matters relating to the management of foreign exchange reserves.
4. RBI also legally cannot actively manage gold
5. *Immunization:* When reserves increase or decrease sharply (lumpy flows), RBI adjusts its investment strategy so that the portfolio’s returns and risk does not change significantly.
6. Apart from the legal statute, the choice of strategy for deployment of reserves would depend on risk appetite, investment priorities, skill sets and operational capabilities of individual institutions. [^8]
7. List of data releases on level of forex reserves.
1. **Weekly Report**
1. [[WSS - Weekly Forex Reserves|WSS - Forex Reserves]] - with a lag of one week [(every Friday)](https://rbi.org.in/Scripts/BS_ViewWss.aspx)
2. **Monthly Report**
1. Foreign Exchange Reserves in "External Sector" section of [Monthly Bulletin](https://rbi.org.in/Scripts/BS_ViewBulletin.aspx)
2. International Reserves and Foreign Currency Liquidity Data Template [(IRFCL)](https://rbi.org.in/scripts/SDDS_ViewDetails.aspx?ID=7) - *On the last working day of the month following the reference month*
3. **Quarterly Report**
1. [Accretion](https://rbi.org.in/Scripts/Publications.aspx?publication=Quarterly) to Foreign Exchange Reserves in India: Sources, Arbitrage and Costs - It is published with a 3-month lag, that is around the end of a quarter.
4. **Half Yearly Report**
1. [[Half-Yearly Report of Forex Reserves|Link]] - They are being prepared with reference to the positions as of 31st March and 30th September each year, with a time lag of about 3 months.
8. It was just USD 1 billion in July 1991.
9. It increased from US$ 38 billion at end-March 2000 to US$ 113 billion in 2003-04 and crossed US$ 300 billion mark in 2007-08.
10. *An interesting fact* is that since 2007, there has been an accumulation in FX reserves in all years [^2] barring 5 years, viz., 2008-09, 2011-12 and 2012-13, 2018-19 and 2022-23 ([Chart 1](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=22526#C1)). - due to abnormal global economic and financial developments (Raut and Rawat, 2022) [^3]
11. A related concept - [Quasi reserves](RBI_Speeches_20060919_Foreign%20Exchange%20Reserves-%20New%20Realities%20and%20Options_Y.V.Redddy.pdf#page=4&selection=84,0,84,14)
## IMF - Reserve Management (Manuals & Guides)
**Guidelines for Foreign Exchange Reserve Management**
1. August 2004 - Guidelines for Foreign Exchange Reserve Management | [pdf](IMF_200408_Guidelines%20for%20Foreign%20Exchange%20Reserve%20Management.pdf)
2. April 2005 - Accompanying Document and Case Studies (2004) | [pdf](IMF_20050415_Guidelines%20for%20Foreign%20Exchange%20Reserve%20Management-Accompanying%20Document%20and%20Case%20Studies.pdf)
3. July 22, 2014 - Revised Guidelines for Foreign Exchange Reserve Management | [pdf](IMF_201407_Revised%20Guidelines%20for%20Foreign%20Exchange%20Reserve%20Management.pdf)
## Data Releases
1. A [[Foreign Exchange Management#Data Releases|list]] of data releases related to the foreign exchange reserves management.
## Related Notes
1. [Capital Flows - Account & Management](Capital%20Flows%20-%20Account%20&%20Management.md)
2. [Exchange Rate Policy](Exchange%20Rate%20Policy.md)
3. [[Foreign Exchange Management]]
4. [Measures to stabilise the exchange market](Measures%20to%20stabilise%20the%20exchange%20market.md)
5. [WSS - Weekly Forex Reserves](WSS%20-%20Weekly%20Forex%20Reserves.md)
6. [Half-Yearly Report of Forex Reserves](Half-Yearly%20Report%20of%20Forex%20Reserves.md)
## References
### [[Speeches & Media Interactions|Speeches]]
1. S.S Tarapore. (November, 1994). ==Foreign Exchange Reserves Management an Indian Perspective==. RBI Monthly Bulletin. [[RBI_Speech_19941121_Foreign Exchange Reserves Management an Indian Perspective_Speech_S.S Tarapore.pdf|pdf]]
2. Reddy, Y. V. (2006, September). ==Foreign exchange reserves: New realities and options==. Program of Seminars, “The World in Asia, Asia in the World,” Singapore. RBI. | [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=300)
3. Y.V. Reddy. Oct 08, 2007. ==Forex Reserves, Stabilization Funds and Sovereign Wealth Funds: Indian Perspective==. (Address by Dr. Y.V.Reddy, Governor, Reserve Bank of India, at the Golden Jubilee Celebrations of the Foreign Exchange Dealers’ Association of India, Mumbai on October 8, 2007). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=357)
4. Y.V. Reddy. (2002, May 10). ==India’s Foreign Exchange Reserves : Policy, Status and Issues==. National Council of Applied Economic Research, New Delhi. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=109) | [[RBI_Speech_20020510_India’s Foreign Exchange Reserves - Policy, Status and Issues by Y.V. Reddy_.V. Reddy.pdf|pdf]]
### [[Publications (Data Releases) & Research#Research|Research]]
1. RBI. (April 18, 2022). Foreign Exchange Reserves Buffer in Emerging Market Economies: Drivers, Motives and Implications. Monthly Bulletin. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941) | [pdf](RBI_Monthly%20Bulletin_202204_Foreign%20Exchange%20Reserves%20Buffer%20in%20Emerging%20Market%20Economies-%20Drivers,%20Motives%20and%20Implications.pdf)
2. Apr 23, 2024. India’s Foreign Exchange Reserves in High Volatility Episodes - An Empirical Assessment, by Saurabh Nath, Dipak R. Chaudhari, Vikram Rajput and Gaurav Tiwari. [Link](https://rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=22526) [pdf](RBI_Monthly_Bulletin_Article_20240423_India’s%20Foreign%20Exchange%20Reserves%20in%20High%20Volatility%20Episodes%20-%20An%20Empirical%20Assessment.pdf)
### [[Publications (Data Releases) & Research#Publications|Publications]]
1. RBI. (March 11, 2004) - First edition of Half Yearly Report on Management of Foreign Exchange Reserves. RBI Bulletin [Link](https://rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=5157) | [pdf](RBI_Monthly_Bulletin_Article_20040311_%20Report%20on%20Foreign%20Exchange%20Reserves.pdf)
### Others
1. Dept. of Economic Affairs (Ministry of Finance). India's External Debt-A Status Report \[Annual Report]. [Link](https://dea.gov.in/files/external_debt_documents/Ex%20Debt%20Report%202024-25_Final.pdf) | [[MoF_Status Report_24-25_India's External Debt-A Status Report_MoF.pdf|pdf]]
2. IMF. (n.d.). _India — International reserves and foreign currency liquidity_ \[Dissemination Standards Bulletin Board.\]. [Link](https://dsbb.imf.org/sdds/dqaf-base/country/IND/category/ILV00)
3. IMF. 2005. Chapter 10- India in "Guidelines for Foreign Exchange Reserve Management: Accompanying Document and Case Studies". [Link](https://www.imf.org/external/pubs/ft/ferm/guidelines/2005/index.htm) | [pdf](IMF_Chapter%2010-India-Guidelines%20for%20Foreign%20Exchange%20Reserve%20Management-Accompanying%20Document%20and%20Case%20Studies.pdf)
[^1]: Dept. of Economic Affairs (Ministry of Finance). India's External Debt-A Status Report \[Annual Report]. [Link](https://dea.gov.in/files/external_debt_documents/Ex%20Debt%20Report%202024-25_Final.pdf) | [[MoF_Status Report_24-25_India's External Debt-A Status Report_MoF.pdf|pdf]]
[^2]: https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=22526#F2
[^3]: https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=22526#F3
[^4]: Joshi, S., & Vidyasagar, P. S. S. (2025, March). Role of Regional Financing Arrangements (RFAs) \[Section in Market access and IMF arrangements: Evidence from across the globe\]. RBI Bulletin, March 2025. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=23262) | [pdf](RBI_Article_20250319_Market%20Access%20and%20IMF%20Arrangements-%20Evidence%20from%20Across%20the%20Globe_Shruti%20Joshi%20and%20PSS%20Vidyasagar.pdf)
[^5]: Reddy, Y. V. (2006, September). Foreign exchange reserves: New realities and options_ \[Speech\]. Program of Seminars, “The World in Asia, Asia in the World,” Singapore. RBI. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=300)
[^6]: S.S Tarapore. (November, 1994). Foreign Exchange Reserves Management an Indian Perspective \[Speech\]. *RBI Monthly Bulletin*. [[RBI_Speech_19941121_Foreign Exchange Reserves Management an Indian Perspective_Speech_S.S Tarapore.pdf|pdf]]
[^7]: RBI. (2022, April 18). Foreign Exchange Reserves Buffer in Emerging Market Economies: Drivers, Motives and Implications. Monthly Bulletin [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20941) | [pdf](RBI_Monthly_Bulletin_Article_202204_Foreign%20Exchange%20Reserves%20Buffer%20in%20Emerging%20Market%20Economies-%20Drivers,%20Motives%20and%20Implications.pdf)
[^8]: RBI. (October 18, 2021). The Low Yield Environment and Forex Reserves Management. RBI Monthly Bulletin (October 2021). [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20569)
[^9]: [^1]: <span style="background-color: #fff9ae">Goldberg, Linda S. October, 2011. The international role of the dollar: Does it matter if this changes?</span> [Link](https://www.newyorkfed.org/medialibrary/media/research/economists/goldberg/int_role_of_the_dollar_changes.pdf)
[^10]: RBI. (March 11, 2004) - First edition of Half Yearly Report on Management of Foreign Exchange Reserves. RBI Bulletin [Link](https://rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=5157) | [pdf](RBI_Monthly_Bulletin_Article_20040311_%20Report%20on%20Foreign%20Exchange%20Reserves.pdf)
[^11]: Subbarao, D. (May 11, 2010). Volatility in capital flows: Some perspectives [Speech]. High-level Conference on ‘The International Monetary System’, Swiss National Bank and the International Monetary Fund, Zurich. Reserve Bank of India. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=504)