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



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


    (Indian Institute of Technology, Bombay)


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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    More about this item


    Reserves; Cointegration; Impulse Response;

    JEL classification:

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


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