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.