Factors Affecting International Reserves with Special Reference to India

Abstract

World international reserves holdings have accelerated sharply in recent times. Countries particularly developing ones are competitive enough to hoard these reserves and top 10 major holders are mostly from Asia. Interestingly India comes only ninth among them. Developing countries, particularly India, are in line to hoard foreign reserves and there are certain factors that affect international reserves holdings. This study analysed the impact of few macroeconomic factors on these reserves. Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) tests were employed to check the stationarity of the variables on the time series data that were of annual frequency. It was found that all variables were co-integrated signalling long-run relationship. Error correction mechanism (ECM) was implemented to get short-run dynamics for which a negative relation was established for trade openness (TRDOP) which contradicts previous studies. The negative relationship of TRDOP with international reserves in India could be due to the outcome of sustained trade deficits of Indian balance of payments. The economic growth variable exhibits a positive relationship which is consistent with previous studies. All variables were found significant at a 5 per cent level. The ECM suggested the same results as its long-run counterpart.

Nexus among Foreign Exchange Reserve, Remittance and Trade Openness: An Empirical Investigation in the Case of Bangladeshi Economy

“…Ume and Ndubuaku (2019) have also found a long-run relationship between the foreign reserve and the real exchange rate in Nigeria by using the ARDL bound test approach. Kashif et al (2017) have used the Johansen cointegration procedure to study the relationship among foreign exchange reserve, trade openness, and economic growth and revealed the long-run equilibrium relationship among the variables. The error correction mechanism has shown the negative relationship between trade openness and foreign exchange reserve, while the economic growth variable has exhibited a positive relationship with reserve.…”

“…Foreign exchange reserve (FER) plays a pivotal role in reducing external debt risks and mitigating the adverse shocks of an unanticipated waning of capital inflow or capital flight (Yongzhong & Freeman, 2013). Usually, countries hold foreign exchange reserves to maintain exchange rate stability and safeguard other economic activities (Kashif, Sridharan, & Thiyagarajan, 2017). A sizeable foreign exchange reserve bolsters a country's competency to carry out various projects and aid to promote economic development.…”

“…Empirical studies have also suggested that the increase in foreign exchange reserves can also promote investment and economic growth (Fukuda & Kon, 2012;Kashif., Singh, Thiyagarajan, & Maheshwari, 2020;Krušković & Maričić, 2015). Several studies have been conducted to explore the determinants of foreign exchange reserve (Aizenman & Marion, 2003;Gantt, 2010;Kashif et al, 2017;Narayan & Smyth, 2006). From these studies, the determinants of foreign exchange reserve can be broadly categorized into five topics: economic size, current account vulnerability, capital account vulnerability, exchange rate flexibility and the opportunity cost of holding reserve (Aizenman & Marion, 2003;Batten, 1982;Frenkel, 1974;Obstfeld, Shambaugh, & Taylor, 2009).…”

“…From these studies, the determinants of foreign exchange reserve can be broadly categorized into five topics: economic size, current account vulnerability, capital account vulnerability, exchange rate flexibility and the opportunity cost of holding reserve (Aizenman & Marion, 2003;Batten, 1982;Frenkel, 1974;Obstfeld, Shambaugh, & Taylor, 2009). Recently, many studies have explored the relationship of foreign exchange reserve with some macroeconomic determinants such as trade balance, money supply, exchange rate, foreign direct investment, inflation, remittance (Cheung & Ito, 2009;Delatte & Fouquau, 2011;Gantt, 2010;Kashif et al, 2017;Narayan & Smyth, 2006;Osigwe & Uzonwanne, 2015;Ume & Ndubuaku, 2019).…”

Linear and Nonlinear Causal Relationships Between International Reserves and Economic Growth: Evidence from India

“…The study uses the definition of IR as suggested by International Financial Statistics. IR include commodities such as gold, foreign currency deposits of the monetary authority, reserve position of the country with IMF and also SDRs (Kashif, Sridharan, & Thiyagarajan, 2017). Furthermore, gold is also excluded because it is negligible when calculated in comparison to the other components of IR.…”