==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. If supply exceed demand, exchange rates will appreciate and sooner or later, the two will equalise at some price. But can [RBI hold the rates at a given level for long](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=4715#:~:text=The%20third%20suggestion%20to%20hold%20the%20rates%20at%20current%20levels%2C), that is not allow USDINR to fall further. Is this really sustainable over a long period of time, given the fact that there could be a sudden stop in capital flows and flow reversal? >**India has adopted an approach of managed-float**. In times of high capital flows, it buys foreign exchange and builds reserves to be able to intervene in the markets when there are outflows due to external shocks, drop in foreign investments or export revenues. a Thus, a [strong umbrella of FX reserves](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1419) becomes imperative for these countries. After the crisis of 1999, many EME central banks have adopted this approach pushing up the share of forex assets in total assets. It has allowed them to conduct independent monetary policy. But at the same time, the value of these reserves may also fall in times of outflow or become vulnerable to extreme swings.