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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.

Suggested Citation

  • Mishra, Ritesh Kumar & Sharma, Chandan, 2011. "India's demand for international reserve and monetary disequilibrium: Reserve adequacy under floating regime," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 901-919.
    • Handle: RePEc:eee:jpolmo:v:33:y:2011:i:6:p:901-919
    DOI: 10.1016/j.jpolmod.2011.03.005
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    More about this item

    Keywords

    Reserve adequacy; Opportunity cost; National monetary disequilibrium; GARCH; India;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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