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India's demand for international reserve and monetary disequilibrium: Reserve adequacy under floating regime

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  • Mishra, Ritesh Kumar
  • Sharma, Chandan

Abstract

The main aim of this study is to investigate India's demand for international reserve by focusing on the role of national monetary disequilibrium and to present new benchmarks for assessing the adequacy of international reserves. We assessed India's position in terms of reserve adequacy and found that India is well placed and has sufficient stock of international reserves to meet the minimum adequacy requirements. Also, the results reveal that the central bank is holding substantial excess reserves and the related opportunity cost (1.5% of GDP) appears to be quite considerable. Further, the estimates of reserve demand function suggest that scale of foreign trade, uncertainty and profitability considerations play significant role in determining India's long-term reserve demand policies. More importantly, validating the monetary approach to balance of payment, our results show that national monetary disequilibrium does play a crucial role in short-run reserve movements. An excess of money demand (supply) induces an inflow (outflow) of international reserves with an elasticity of 0.56 which also implies that Reserve Bank of India responds to correct the domestic money market disequilibrium; and did not just leave it completely on the mercy of reserve inflows.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 33 (2011)
Issue (Month): 6 ()
Pages: 901-919

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Handle: RePEc:eee:jpolmo:v:33:y:2011:i:6:p:901-919

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Web page: http://www.elsevier.com/locate/inca/505735

Related research

Keywords: Reserve adequacy; Opportunity cost; National monetary disequilibrium; GARCH; India;

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Cited by:
  1. Chandan Sharma & Sunny K Singh, 2014. "Determinants of International Reserves: Empirical Evidence from Emerging Asia," Economics Bulletin, AccessEcon, vol. 34(3), pages 1696-1703.
  2. Reddy, Kotapati Srinivasa & Nangia, Vinay Kumar & Agrawal, Rajat, 2013. "Indian economic-policy reforms, bank mergers, and lawful proposals: The ex-ante and ex-post ‘lookup’," Journal of Policy Modeling, Elsevier, Elsevier, vol. 35(4), pages 601-622.

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