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Determinants of Foreign Exchange Reserves in India: A Multivariate Cointegration Analysis

Author

Listed:
  • DASH, PRIYADARSHI

    (Research and Information System for Developing Countries (RIS), New Delhi)

  • NARAYANAN, K.

    (Indian Institute of Technology, Bombay)

Abstract

This paper attempts to identify the key determinants of foreign exchange reserves in India using Johansen (1995) Maximum-Likelihood Vector Error Correction Model (VECM) on monthly as well as annual data for reserves, imports and nominal exchange rate. The empirical results confirm that there exists a long-run cointegrating relationship among reserves, imports and nominal exchange rate. The shocks to imports and exchange rate have permanent effects on reserves, on level as well as volatility. Drawing inferences from these findings, it can be suggested that any target level of reserves could be feasible only in the short-run as the model produces a stationary equilibrium relationship among these three core variables of a standard reserve demand function.

Suggested Citation

  • Dash, Priyadarshi & Narayanan, K., 2011. "Determinants of Foreign Exchange Reserves in India: A Multivariate Cointegration Analysis," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 46(1), pages 83-107.
    • Handle: RePEc:dse:indecr:0032
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    Cited by:

    1. Jun Wen & Xinxin Zhao & Quan-Jing Wang & Chun-Ping Chang, 2021. "The impact of international sanctions on energy security," Energy & Environment, , vol. 32(3), pages 458-480, May.
    2. Mohammad Kashif & P. Sridharan & S. Thiyagarajan, 2017. "Factors Affecting International Reserves with Special Reference to India," Vision, , vol. 21(4), pages 339-349, December.
    3. Dakhlallah Kassim, 2019. "Reserve Adequacies and the Determinants of Foreign Exchange Reserves – Empirical Analysis through the Vector Error Correction Model: The Case of Lebanon," Review of Middle East Economics and Finance, De Gruyter, vol. 15(2), pages 1-17, August.

    More about this item

    Keywords

    Reserves; Cointegration; Impulse Response;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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