A PROJECT REPORT

ON

“A STUDY ON IMPACT OF COVID-19 ON FOREIGN EXCHANGE

RESERVES OF INDIA”

Submitted in partial fulfillment of requirement for the

Award of

MASTER OF BUSINESS ADMINISTRATION

SUBMITTED TO
OSMANIA UNIVERSITY

BY

PALLIKONDA UMME AYMAN

H.T.NO: 104321672026

Under the Guidance of

Dr. RAM MOHAN RAO

OSMANIA UNIVERSITY POST GRADUATE COLLEGE

SIDDIPET -502103

(2021-2023)

1
 OSMANIA UNIVERSITY

POST GRADUATE COLLEGE

SIDDIPET-502103

CERTIFICATE

This is to certify that the project report titled “A STUDY ON IMPACT OF COVID-19 ON FOREIGN
EXCHANGE RESERVES OF INIDA” is submitted in partial fulfillment for the award of the Degree
of MASTER OF BUSINESS ADMINISTRATION for the Department of Business Administration,
OU PG COLLEGE, SIDDIPET, carried out by PALLIKONDA UMME AYMAN, H.NO:
104321672026 under my guidance. This has not been submitted to any other University or Institution
for the award of any Degree/Diploma/Certificate.

Dr. RAVINATH. M

EXTERNAL EXAMINER PRINCIPAL

2
 OSMANIA UNIVERSITY

POST GRADUATE COLLEGE

SIDDIPET-502103

CERTIFICATE

This is to certify that the project report titled “A STUDY ON IMPACT OF COVID-19 ON FOREIGN
EXCHANGE RESERVES OF INIDA” is submitted in partial fulfillment for the award of the Degree
of MASTER OF BUSINESS ADMINISTRATION for the Department of Business Administration,
OU PG COLLEGE, SIDDIPET, carried out by PALLIKONDA UMME AYMAN, H.NO:
104321672026 under my guidance. This has not been submitted to any other University or Institution
for the award of any Degree/Diploma/Certificate.

Dr. CH. RAM MOHAN RAO

PROJECT GUIDE

3
 OSMANIA UNIVERSITY

POST GRADUATE COLLEGE

SIDDIPET-502103

CERTIFICATE

This is to certify that the project report titled “A STUDY ON IMPACT OF COVID-19 ON
FOREIGN EXCHANGE RESERVES OF INIDA” is submitted in partial fulfillment for the award
of the Degree of MASTER OF BUSINESS ADMINISTRATION for the Department of Business
Administration, OU PG COLLEGE, SIDDIPET, carried out by PALLIKONDA UMME AYMAN,
H.NO: 104321672026 under my guidance. This has not been submitted to any other University or
Institution for the award of any Degree/Diploma/Certificate.

Dr. RAJU POLUMARU

HEAD OF THE DEPARTMENT

4
 DECLARATION
I here by declare that the project titled “A STUDY ON IMPACT OF COVID-19 ON
FOREIGN EXCHANGE RESERVES OF INIDA” has been prepared by me as a part
of requirement of "Master of Business Administration" degree of OSMANIA
UNIVERSITY and this study is my original project report.

Date: (PALLIKONDA UMME AYMAN)

Place: HT. No: 104321672026

5
 ACKNOWLEDGEMENT
I Wish to extend my hearty thanks to OSMANIA UNIVERSITY for the opportunity given to
carry out this project which I thoroughly enjoyed doing.

I deeply, I express my gratitude to Dr. M. RAVINATH principal OSMANIA

UNIVERSITY POST GRADUATE COLLEGE, SIDDIPET.

I am indebted to my guide Dr. RAM MOHAN RAO, and Dr. RAJU

POLUMARU (HOD), for taking keen interest in the project and sparing his valuable time
throughout the course of the project and instructing at each level for the proper outcome of this
project.

I am also thankful to my all my family members, faculty and my friends for their constant support
and co-operation in completing this project successfully.

(PALLIKONDA UMME AYMAN)

6
 INDEX
S NO PARTICULARS PAGE NO

1 Chapter-1 Introduction 1 - 16
1.1 Foreign Exchange Reserve – Meaning & Definition
1.2 Statement of the Problem
1.3 Scope of the Study
1.4 Need of the Study
1.5 Significance of the Study
1.6 Objectives of the Study
2 Chapter-2 Review of Literature 17 - 22

3 Chapter-3 Research Methodology 23 - 25

3.1 Research Design
3.2 Data Sources
3.3 Data collection procedure
3.4 Data analysis Tools
3.5 Period of the Study
3.6 Limitations of the Study
4 Chapter-4 Data Analysis & Interpretation 26 - 37
4.1 Secondary Data
5 Chapter-5 Findings, Conclusion & suggestions 38- 43

Bibliography 44 - 48

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ABSTRACT:

Foreign exchange reserves are the foreign currency cash or any international reserve asset held
by the monetary authority of the country. A country must accumulate an adequate level of
foreign exchange reserves so that the country can meet its all external obligations. At the same
time, it is also important to ensure proper management and utilisation of foreign exchange
reserves for the economic development of the nation. During the period of COVID19
pandemic, a significant rise in foreign exchange reserve has been observed. So, the study is
done to analyse the trends and adequacy level of foreign exchange reserves of India. The study
also aims to analyse the effective way of utilising the foreign exchange reserves which can
boost up the economy. The study is based on the data collected from secondary sources such
as annual reports, monthly bulletins of RBI, official website of the Ministry of Finance,
Government of India, IMF and World Bank. The study revealed that in the month of March
2020 India’s stock of foreign exchange reserves declined significantly and from the month of
April 2020 the trend shifted upwards and shows some positive growth. It has also been
observed that the country is holding a sufficient amount of foreign exchange reserves which is
much higher than the adequacy level. So, the government should take the full advantage of
growing excess foreign exchange reserves and a portion of its reserves for the economic
development of the nation during or after the pandemic crisis.

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 CHAPTER-1
INTRODUCTION

1
INTRODUCTION :

The outbreak of COVID-19 pandemic or Coronavirus has shaken the entire world adversely.
This unprecedented crisis has a severe impact on most of the countries in the globe both socially
and economically. As the virus spread worldwide, many countries have taken various
precautionary measures to limit the spread through the implementation of social isolation
policies such as limiting human movement, shutdown of industries and educational institutions.
Consequently, it has a significant impact on all the economies and through trade and tourism,
it impacts partners economies as well (Maliszewska, M. et al, 2020). Low production, trade
and limited connectivity due to nationwide lockdown forced slowdown of the entire economy.
World Bank Group (2020) forecasted that the global GDP in 2020 will contract sharply by
5.2% due to the COVID-19 pandemic. International Monetary Fund (IMF, 2020) stated that
this is the „Great Lockdown‟ and it projects 3% contraction of the global GDP, much worse
than global financial crisis 2008. Accordingly, an economic downturn has been seen in India
as well. The country was already in economic turmoil in the pre-pandemic period, but the
current crisis hit the country harder. The country faces massive loss of job and the productivity
registered a low record. According to the IMF (2020), India will be the large economy worst
hit by COVID-19 pandemic and they projected that Indian GDP growth will shrink by 4.5%.
On the other hand, World Bank (2020) warns drop of Indian GDP by 2.5% this year. With an
expectation of economic boost up and to combat with this crisis, the government of India have
announced an economic package of INR 20 lacs crores in two different phases including RBI‟s
liquidity stimulus to increase the money supply (The Economic Times, 2020). When the
economy is under shock and the country is still suffering through the pandemic, some positive
outcomes have been observed amidst the crisis. India has registered surplus volume in the trade
balance which results in current account surplus and foreign exchange reserves (FER) are also
rising and jumped to all-time high level. Holding of higher level of reserves ensure a certain
level of resistance to confront emergencies like currency crisis. Moreover, it enhances the
confidence of investors dealing in foreign currencies and also acts as a buffer stock in times of
financial shock. The sudden and significant rise in foreign exchange reserves triggered
questions in our mind that: Does India have sufficient foreign exchange reserves to meet any
unexpected shock and can it be used as a monetary tool to stimulate the economy in this crisis
situation? These innate questions motivate us to empirically analyse the current scenario and
framework of India‟s foreign exchange reserves.

2
Foreign Exchange Reserves:

Foreign-exchange reserves (also called forex reserves or FX reserves) is money or other assets
held by a central bank or other monetary authority so that it can pay if need be its liabilities,
such as the currency issued by the central bank, as well as the various bank reserves deposited
with the central bank by the government and other financial institutions. Reserves are held in
one or more reserve currency, mostly the United States dollar and to a lesser extent the EU's
euro, the British pound sterling, and the Japanese yen. Foreign exchange reserves should
ideally include foreign bank notes, foreign bank deposits, foreign treasury bills, and short and
long-term foreign government securities. However, they also include gold reserves, special
drawing rights (SDRs), and International Monetary Fund (IMF) reserve positions. This broader
figure, along with SDR’s, gold reserves and IMF reserve positions is more readily used. Thus,
in a nutshell, Foreign Exchange Reserves include-

• Reserves held in US Dollars, The Euro, The British Pound or the Japanese Yen

• Foreign bank notes, foreign bank deposits, foreign treasury bills and short term and long term
foreign government securities

• Gold reserves

• Special Drawing Rights

International Monetary Fund reserve positions Foreign-exchange reserves are called reserve
assets in the balance of payments and are located in the capital account. Hence, form an
important part of the international investment position of a country.

Why hold Foreign Exchange Reserves?

Holding international reserves assets allows a central bank to purchase the domestic currency,
which is considered a liability for the central bank (since it prints the currency). Thus, the
quantity of foreign exchange reserves can change as a central bank implements monetary
policy, but this dynamic should be analysed generally in the context of the level of capital
mobility, the exchange rate regime and other factors. Hence, in a world of perfect capital
mobility, a country with fixed exchange rate would not be able to execute an independent
monetary policy. Non-sterilization will cause an expansion or contraction in the amount of
domestic currency in circulation, and hence directly affect inflation and monetary policy.

3
Sterilization means the intervention by the central bank to influence the exchange value of the
domestic currency, by buying and selling of foreign currency. For example, to maintain the
same exchange rate if there is increased demand, the central bank can issue more of the
domestic currency and purchase foreign currency, which will increase the sum of foreign
reserves. Since (if there is no sterilization) the domestic money supply is increasing (money is
being 'printed'), this may provoke domestic inflation. Since the amount of foreign reserves
available to defend a weak currency (a currency in low demand) is limited, a currency crisis or
devaluation could be the end result. On the other hand, this is costly, since the sterilization is
usually done by public debt instruments. In practice, few central banks or currency regimes
operate on such a simplistic level, and numerous other factors (domestic demand, production
and productivity, imports and exports, relative prices of goods and services, etc.) will affect the
eventual outcome. Besides this, the belief that the world economy operates under perfect capital
mobility is clearly flawed. As a consequence, even those countries and their central banks that
strictly limit foreign exchange interventions often recognize that currency markets can be
volatile and may intervene to counter disruptive short-term movements (that may include
speculative attacks). Thus, intervention does not mean that they are defending a specific
exchange rate level. Hence, the higher the reserves, the higher is the capacity of the central
bank to smooth the volatility of the Balance of Payments and assure consumption smoothing
in the long term.

4
The foreign exchange reserves of India consist of below four categories:

➢ Foreign Currency Assets Foreign currency assets expressed in US dollar terms include
the effect of appreciation/depreciation of non-US currencies (such as Euro, Sterling,
Yen) held in reserves.
➢ Gold Reserves The Reserve Bank holds 557.77 tonnes of gold; of which, 265.49 tonnes
are held overseas in safe custody with the Bank of England and the Bank for
International Settlements (BIS). Gold as a share of the total foreign exchange reserves
in value terms (USD) stood at about 5.6 per cent as at end-March, 2016.
➢ Special Drawing Rights Special Drawing Rights (SDRs) are supplementary foreign
exchange reserve assets defined and maintained by the International Monetary Fund. It
was created in 1969 to supplement a shortfall of preferred foreign exchange reserve
assets, namely gold and the US dollar, the SDR's value is defined by a weighted
currency basket of four major currencies: the Euro, the US dollar, the British pound,
and the Japanese yen Currently, the value of one SDR is equal to the sum of 0.423
Euros, 12.1 Yen, 0.111 pounds, and 0.66 US Dollars. This basket is reevaluated every
five years, and the currencies included as well as the weights given to them can then
change.
➢ Reserve Tranche Position The primary means of financing the International Monetary
Fund is through members' quotas. Each member of the IMF is assigned a quota, part of
which is payable in SDRs or specified usable currencies ("reserve assets"), and part in
the member's own currency. The difference between a member's quota and the IMF's
holdings of its currency is a country's Reserve Tranche Position (RTP).Reserve
Tranche Position is accounted among a country's Foreign Exchange Reserves.

5
Management of forex reserves :

Management of Forex Reserves is basically a process of ensuring that an adequate amount of

foreign assets is readily available with the authorities for meeting certain defined objectives for
the country. The onus for managing the reserves is on a reserve management entity which is
RBI, in case of India. RBI has dual role to play- one is of monetary authority & other is of
custodian of reserves. As a monetary authority, RBI has to ensure macroeconomic financial
stability in general & external stability in particular. As a custodian, RBI has to ensure the
liquidity, safety & yield on deployment of reserves.

Two important aspects of managing the reserves are:

1) Assessing the benefits of holding the reserves

2) Assessing the opportunity cost of managing the reserves.

The major benefit of holding the sufficient reserves is that it acts as a buffer during the forex
market pressures & thereby helps to prevent the external crisis, especially the ones which
emerges from the capital account. For emerging economies like India, higher levels of forex
reserves provide assurance to the global community that external liability will be paid and
exchange rate will be stabilized as and when required. The flip side of higher level of forex
reserves is that it locks domestic currency in foreign currency assets which otherwise could be
used for increasing domestic investment. On the other hand, for emerging economies like India,
the lower level of foreign exchange reserves is a curse as it limits the ability of central bank to
intervene in forex market to stabilize exchange rate and equalize the balance of payment which
could ultimately lead to depreciation of domestic currency. Depreciation of home currency will
further lead to inflation. However, maintaining such level of Forex reserves results in the loss
of opportunity cost. This opportunity cost is basically the investment made in purchasing the
reserves which otherwise could have been used for increasing the domestic capital. So, there
is always a cost associated with holding higher than adequate or inadequate level of foreign
exchange reserve. Management of reserve basically tries to minimize this opportunity cost
against the benefits arising from holding the reserves which is very crucial for a country like
India.

6
Foreign Exchange Reserves Importance:

Foreign exchange reserves play a crucial role in the economic stability and resilience of a
nation. The importance of forex reserves can be understood through the following key points:

➢ Currency Stability

Forex reserves act as a safeguard against sharp declines in a country’s currency value during
times of market volatility. Central banks can supply dollars or other reserve currencies to
stabilize their domestic currency and prevent excessive depreciation. This helps maintain
stability in international trade and investments.

➢ Economic Growth and Management

Ample foreign exchange reserves provide a level of comfort for the government and central
bank in managing both external and internal financial issues. During times of economic
contraction or crisis, such reserves can be utilized to mitigate the impact and support the overall
economic growth of the country.

➢ Meeting Foreign Exchange Needs and Debt Obligations

Having substantial forex reserves ensures that a country can meet its foreign exchange
requirements and fulfill external debt obligations. This instills confidence in lenders, investors,
and markets, as it demonstrates the ability to handle international financial commitments
effectively.

➢ Currency Appreciation

Rising forex reserves contribute to the appreciation of the domestic currency. A strong currency
enhances purchasing power, reduces import costs, and boosts investor confidence, thereby
attracting foreign investments and fostering economic growth.

➢ Crisis Management

Forex reserves act as a cushion in times of Balance of Payment (BoP) crises. They serve as a
vital resource to cover import bills and sustain economic stability, even in challenging
circumstances. Sufficient reserves can help alleviate the impact of external shocks and provide
a buffer to navigate through difficult economic periods.

➢ Market Confidence

7
The presence of robust forex reserves instills confidence in both domestic and international
markets. It assures investors that a country possesses the necessary resources to meet its
external obligations and encourages stability in financial markets.

Forex Reserve in India

The long-term trend of forex reserves in India has shown a significant increase over the years,
reflecting the country’s efforts to bolster its foreign exchange holdings and strengthen its
economic position. Here is an overview of the long-term trend of forex reserves in India:

➢ Early Years

In the early years after India’s independence in 1947, the forex reserves were relatively modest,
reflecting the country’s nascent economic development and limited international trade.

➢ Liberalization and Reforms

Following the economic reforms and liberalization initiatives introduced in the early 1990s,
India experienced a notable increase in forex reserves. These reforms aimed to open up the
economy, attract foreign investment, and boost exports. As a result, the forex reserves began to
grow steadily.

➢ Robust Growth

From the 2000s onward, India witnessed a remarkable expansion in forex reserves. Factors
contributing to this growth include increasing foreign direct investment (FDI), growth in
exports, a surge in remittances from Indians working abroad, and greater stability in the
country’s balance of payments.

➢ Foreign Investment Inflows

The influx of foreign investments, particularly in sectors such as information technology,

services, and manufacturing, further contributed to the upward trajectory of forex reserves in
India. These investments brought in foreign currency, which added to the reserves.

➢ Forex Accumulation Policy

8
India’s central bank, the Reserve Bank of India (RBI), has pursued a policy of actively
accumulating forex reserves as a means to enhance financial stability and manage exchange
rate volatility. This policy has involved strategic interventions in the foreign exchange market,
including purchasing foreign currencies and gold, to bolster the reserves.

➢ Volatility and Interventions

Periods of global economic volatility, such as the global financial crisis in 2008 and the
COVID-19 pandemic, prompted increased interventions by the RBI to maintain stability in the
forex market. These interventions have aimed to prevent excessive currency depreciation and
ensure sufficient forex reserves to meet external obligations.

➢ Current Status

As of January 2022, India’s forex reserves stood at USD $634.287 billion, marking a significant
increase from previous years. India’s forex reserves have consistently ranked among the top in
the world, highlighting the country’s strong position in terms of foreign exchange holdings.

Purpose of maintain Forex:

Typically, one of the critical functions of a country's central bank is reserve management, to
ensure that the central bank has control over adequate foreign assets to meet national objectives.
These objectives may include:

➢ Supporting and maintaining confidence in the national monetary and exchange rate
management policies,
➢ Limiting external vulnerability to shocks during times of crisis or when access to
borrowing is curtailed, and in doing so – ➢ Providing a level of confidence to markets,
➢ Demonstrating backing for the domestic currency,
➢ Assisting the government to meet its foreign exchange needs and external debt
obligations, and
➢ Maintaining a reserve for potential national disasters or emergencies.

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Costs and Risks of Holding Foreign Exchange Reserves:

The costs that may arise because of holding excess reserves are as follows:
Sterilization costs- Sterilization basically neutralizes the inflationary monetary impact of
reserve accumulation by offsetting the associated increase in money supply with a domestic
money market operation, typically domestic debt issuance (Russel Green and Tom Toregerson,
Are High Foreign Exchange Reserves n emerging markets a blessing or a burden?).
Sterilization involves controlling domestic currency appreciation which may result in
inflationary pressures and can hamper a country‟s growth. Sterilizing reserve accumulation can
be quite regarded as a good tool for controlling inflation in a country, however fully sterilizing
reserve accumulation can be challenging. There are basically three challenges which can limit
or hamper the usefulness produced by sterilization. These are:

The fiscal costs of intervention- It represents the difference between what the central bank
earns on international reserves and what it pays on the domestic debt issued to sterilize the
reserves.

Future monetary imbalances- The long term effectiveness of sterilized intervention depends
upon the tools used for sterilization and on which sector it ends up. Large scale reserve
accumulation typically raises the underlying liquidity position of the banking system and this
can be partly neutralized by selling long term government bonds to banks which in turn will be
sold by banks to non-banks usually households and corporates. This will reasonably complete
sterilization. Financial sector imbalances- Sterilized intervention to prevent a rise in
exchange rate can affect macroeconomic and financial imbalances like increased bank lending
resulting from partial or ineffective sterilization could finance excessive investment in certain
sectors such as property markets and may lead to the formation of property bubbles. ii.
Opportunity costs- The resources or funds that are used to purchase foreign exchange reserves
could be used for several other purposes, like a government could pay off its sovereign short
term external debt, since the interest cost of a given amount of short term external debt likely
exceeds the earnings on an equivalent amount of reserves. Another purpose for utilizing the
resources instead of acquiring reserves could be reserves spend by government on investment
projects, with the constraint that reserves cannot be converted back into local currency if
authorities wish to avoid an impact on the exchange rate. For example, reserves could be used
to purchase medical supplies and equipment from a foreign country.

10
iii. Central bank balance sheet risk- Foreign exchange reserves are just like any other foreign
currency asset, which can lose its value in local terms if the exchange rate appreciates. As long
as interest margins and cash flows remain positive, it may be feasible for central banks to
operate with negative capital for a considerable period. However, leaving itself
undercapitalized could in time jeopardize the central bank‟s credibility and ability to target
price stability, to intermediate government foreign borrowing, to act as lender of last resort,
or to maintain a domestic payments system. iv. Other costs- Reserve accumulation may render
a false sense of security, delaying necessary reforms. While reserves may provide some
protection against external crises, otherwise unsustainable policies cause undesirable
distortions even when they do not end in crises. Large fiscal deficits, for instance, may crowd
out private sector investments or create debt overhang problems. And these vulnerabilities, if
allowed to grow too large, may overwhelm the insulating effect of reserves and surprise a
country previously considered secure.

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1.2 Statement of the problem:

The study is on the impact of Covid-19 on foreign exchange reserve of India. In amid of
COVID-19 pandemic has affected not only health but also wealth of the country. The problem
to be focused on is how the trade activities have been effected during Covid-19, which also
results in having an impact on foreign exchange reserve of India. This study can give an insight
view to the policy makers to respond to covid-19 in regard to foreign exchange reserve. It also
analyses the growth of forex after Covid.

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1.3 Scope of the Study:

The Study is on the impact of Covid-19 on foreign exchange reserve of India. This study is
intended to analyse the performance of the forex during and after Covid-19 period. The scope
of the study is limited to India.

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1.4 Need for the study:

At the time when global financial community has transcended the most devastating economic
crisis. India has garnered unprecedented foreign exchange reserve and simultaneously has been
experiencing depreciation in foreign exchange rate due to tumble in global supply chain. All
most all sectors are negatively affected.Along with reduced expectations, financial markets are
also negatively affected. This study analysis to find out the impact of novel corona virus on
foreign exchange reserve and foreign exchange rate in Indian scenario. This relevance of the
finding will help the government in making economic policies and it also helps to investors to
monitor the capital market as well as to develop the portfolio of investment to earn better return
by minimizing the losses.

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1.5 Significance of the Study :

This study holds significant implications for various stakeholders in India. Firstly, it provides
policymakers with valuable insights into the effectiveness of their policy responses during the
pandemic. Understanding how the government's measures impacted foreign exchange reserves
and exchange rates can guide future crisis management strategies. Secondly, the research study
benefits businesses and investors by shedding light on the risks and opportunities present in the
foreign exchange market during extraordinary events like the COVID-19 pandemic. This
understanding can help them navigate uncertainties, manage currency risks, and make informed
investment decisions. Thirdly, the study contributes to the existing body of knowledge on the
impact of pandemics on economies. It adds to the understanding of how foreign exchange
markets react to global crises, providing lessons for other countries facing similar challenges
in the future.

15
1.6 Objectives of the Study:

The present research work is conducted with following objectives:

i. To assess the impact of Covid-19 on the change of foreign exchange reserve of India.
ii. To observe the trend of India’s foreign exchange reserves during COVID-19
pandemic and after Covid.
iii. To measure the feedback impact of foreign exchange rate on foreign exchange
reserve.

16
 CHAPTER-2

REVIEW OF LITERATURE

17
Review of Literature:

In the present chapter the review of literature relevant to foreign reserves will be thoroughly
examined, and the impact of Covid-19 will be evaluated. The probing of previous research
studies will serve the purpose of the identification of research gap for the present study. The
research objectives are framed in order to fill up the gap.

1. (Rane, K. 2006; Rajan, R.S. and Gopalan, S., 2008; Das, R. and Nath, S., 2015). Their
studies found that India‟s stock of foreign exchange reserve was more than adequate
and hold a much better position than other emerging economies. In addition, Arslan, Y.
and Cantu, C. (2019) argued that until 2000, precautionary motives were the main drive
for reserve accumulation but in the recent time monetary and exchange rate policies
plays a more important role in reserve accumulation.
2. Sahu, H. (2014) stated that the reserves adequacy act as an important parameter for
determining the shock absorption capacity of a country which should not be limited to
cover certain months of import bill but also the other factors influencing foreign
exchange reserves. Regarding the use of foreign exchange reserve.
3. Singh, C. (2005) studied the decision of the government to use the foreign exchange
reserve as an infrastructural investment in the year 2005. He found that the size of
foreign exchange reserve does not support infrastructural investment and he argued
that the proposed plan may create more economic problem than An Analysis of Rising
Foreign Exchange Reserves of India During the Covid-19 Pandemic and its Potential
use for Economic Development http://www.iaeme.com/IJARET/index.asp 375
editor@iaeme.com expected benefit. He suggested that it will be possible in future if
the country keeps on accumulating reserves and can enhance its return on investment.
4. Achille, C., Mezui, M. and Duru, U. (2013) compared holding of excess reserves or its
use as infrastructural an investment in African nations. They estimate that the gap
between the actual reserves and adequate reserves are higher than the infrastructural
gap in African countries and suggested proper management for investment in
infrastructural growth.
5. Rizvi, S.K.A. et al. (2011) made a study on the accumulation and use of reserve as a
monetary tool and they found that excessive reserve accumulation during the study
period stimulate the economy in terms of GDP growth, stabilised exchange rate and
less debt burden of debt and deficit.

18
6. Dominguez, K., Hashimoto, Y., and Ito, T. (2011) argued that excess foreign exchange
reserves before the crisis may protect a country from uneven speculative attacks and it
can be used as lender of last resort facilities in central banks. Their findings support
this argument that higher precrisis reserves are related to higher post-crisis GDP
growth.
7. Green and Torgerson (2007) in their occasional paper examined the motivations and
costs of foreign exchange reserve accumulation among the world‟s largest emerging
market holders of reserves. Their analysis mainly suggests that net marginal return to
additional reserves is low, if not extremely negative, yielding scant support for the
proposition that the largest reserve holders were holding foreign exchange reserves
exclusively for precautionary purposes and their policy was not about the allocation of
existing reserves, but about further reserve accumulation. They focused on the
emerging market economies (China, Taiwan, South Korea, Russia, India, Mexico and
Malaysia) considering them on the basis of determinants of foreign exchange reserves
or finding out how adequately they maintained reserves based on the determinants. It
was found that the seven economies match up to the Greenspan Guidotti threshold for
reserves/short term debt. All hold several multiples of their short term debt in reserves,
with China far ahead of the rest at more than eleven times short term debt.Coverage of
money supply (M2), showed a similar picture. It was advised that India, Mexico and
Russia should perhaps be measured against the low end of the 5- 20% benchmark range
as countries with the flexible exchange rate. The third determinant which is trade based,
i.e., import coverage was regarded as less relevant for economies with capital market
access. Even so, none of the top reserve holders demonstrate vulnerability. Mexico had
the lowest import coverage ratio at 3.8 months. Every other economy was well beyond
four months of import coverage. The comparisons presented thus far involve
benchmarks against single statistics. Green and Torgerson considered a different
approach wherein they included a full range of fundamentals by estimating the demand
for reserves in multivariate setting. Their estimate of such a measure captures the
relative weight put on various sources of vulnerability. This approach does not indicate
divergence from appropriate levels of reserves, as countries may have followed
suboptimal reserve policies in the past. However, under the assumption that countries
generally hold adequate reserves relative to the fundamentals, the estimates can be used
to determine whether out of sample reserve levels are adequate.

19
8. Sahu (2015) basically placed his work on determining and maintaining the adequate
level of reserves. He measured the level of India‟s foreign exchange reserves in terms
of the criterias(discussed in conceptual framework). The study period of his research
was from 2001-02 to 2014-15 (December). He emphasized on the level of foreign
exchange reserves that India maintained during the period of study and it revealed that
import coverage ratio far exceeds the international benchmark of 3 months. This
measure of import coverage showed that India‟s yearly import coverage ratio was
highest in 2003-04 and lowest in 2012-13. In terms of monthly import coverage in
2003-04 was 16.5 months, whereas in 2012-13 it was 6.5 months. India‟s ratio of
foreign exchange reserve to import in all years was higher than 25% (standard
benchmark) and in the first seven years forex reserves were higher than imports. This
measure showed that India‟s forex reserves were adequate, but import is not the only
factor determining the adequate level of forex reserves.The universally accepted ratio
for covering short term external debt is 1, meaning that foreign exchange reserve
should cover 100% of the country‟s short term debt and it should not fall below 100%.
In India, it was found that this ratio was always more than 1, meaning India‟s forex
reserve was always sufficient during the study period.
9. Kapteyn (2001), suggested reserves equivalent to 5%-20% of M2, depending on the
exchange rate regime, as an appropriate buffer. India maintains market determined
exchange rate and it was found that ratio of foreign exchange reserve to broad money
(M2) was always more than 10%.Countering evidence was found when Sahu combined
all the three determinants and it showed the trend of foreign exchange reserve gap. Gap
was estimated by taking the difference between estimated foreign exchange reserves
by taking sum of year end imports, short term external debt and broad money and actual
foreign exchange reserve holdings excluding gold reserves. This gap gradually
increased from financial year 2001-01 till 2012-13, afterwards the trend reversed and
gap started declining.
10. Dash and Narayanan (2011) attempted 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. They captured the short term dynamics and their approach
began with a careful understanding of time series properties of the data.

20
 The variables included in their empirical model were imports, rupeedollar bilateral
nominal exchange rate, opportunity cost (call-money rate) and capital flows in levels.It
was suggested that there exists a long run relationship among imports, reserves and
exchange rate and the monthly data estimations showed that the exchange rate shock
exerts a permanent effect on reserves, both on level and volatility. The results from
estimations using annual data broadly replicated the results from estimation based on
monthly data.
11. Mohanty and Turner (2006) stressed on the sterilization process, wherein they argue
that effective sterilization can bring good results to a country. However, ineffective
sterilization may hamper the growth of the economy and may also bring
macroeconomic instability. They brought forward the issue that sterilized intervention
is more effective in influencing the exchange rate in emerging market economies. The
question explored here was that “how prolonged reserve accumulation poses risks for
the domestic economy that could eventually discourage further intervention?” They
said that financing of the prolonged and substantial accumulation of foreign exchange
reserves has implications for the balance sheets of the central bank, the banking system
and, indeed, the private sector. Balance sheet effects might reduce the effectiveness of
sterilization, with possible inflationary implications. Potential problems include the
high costs of intervention, unsustainable increases in credit and asset prices, and an
increasingly inefficient financial system. Many countries accumulating reserves over
the past few years have faced conditions of substantial excess capacity of reserves and
low inflation, which meant that policy rates could be eased in the face of upward
pressure on the currency. In turn they found that reserve accumulation did not create
any dilemma policymakers faced in earlier high inflation episodes when they had to
choose between inflation objective and their exchange rate objective.They argued that
capital inflows- particularly portfolio inflows, have often been seen as temporary
(perhaps justifying intervention). Moreover, there‟s a tendency among investors and
currency traders to identify persistent current account surpluses with an appreciation
of the long run equilibrium exchange rate, resisting from this may cause even larger
inflows of capital, creating a vicious circle of increased appreciation and yet more
intervention.

21
12. Sen (2005) in his article basically looked at the volatility that comes with the inflow of
foreign capital or we can say through the accumulation of excess reserves. He pointed
out mainly on the two types of inflows- FDI (Foreign Direct Investment) and
FII (Foreign Institutional Investment). FDI adds to the productive capacity of a country
and it also facilitates the transfer of technology and is not volatile. On the other hand,
there are other flows like FII and NRI deposits. These flows are highly volatile as
suggested by his study. There was some evidence that RBI deliberately intervened to
keep the real effective exchange rate constant, especially in the initial stages of the
inflows when the flow was viewed as temporary. This purchase of foreign exchange
reserves raises the monetary base but RBI neutralized (sterilized) through a
contractionary open market operation, i.e., via the sale of government bonds. It was
also found that costs associated with this sterilization lied in the government bonds
(carrying a high rate of interest compared to that of foreign exchange). Thus, he
concluded that as forex reserves rises, so do costs of holding them.
13. Rakshit & paul (2020): Highlighted theoretically the impact of coronavirus on the
different sectors of Indian economy. This paper suggests some strategies that the Indian
business should follow to cope with the effect of corona virus.
14. Aslam et al.(2020): Examined the efficiency of foreign exchange market during
COVID19 pandemic. The paper employs multi fractal detrended fluctuation analysis
(MF-DFA). The researchers have use five min interval high frequent data of six major
exchange rates (AUD,CAD,CHF,EUR,GBP and JPY) against the US dollar and found
that there is varying in degree of foreign exchange market before and during the spill
over of COVID 19.
15. Hassen et al. (2020): Conducted a research in order to investigate the long run
relationship between the oil price of Saudi Arabia and the real exchange rate of the
country. The result shows that there is strong co integration between the variables.

22
 CHAPTER-3
RESEARCH METHODOLOGY

23
Research Methodology:

The research methodology section outlines the approach and techniques used to gather and
analyze data for studying the impact of COVID-19 on India's foreign exchange reserves. This
research employs both quantitative and qualitative tools to provide a comprehensive
understanding of the dynamics in the foreign exchange market during the pandemic.

3.1 Research Design: The study adopts a concurrent triangulation design, combining
quantitative and qualitative data collection and analysis methods. This design allows for a
comprehensive investigation of the research topic by corroborating findings from different data
sources and perspectives. The concurrent nature of the design ensures that quantitative and
qualitative data are collected and analyzed simultaneously, enabling a more in-depth
understanding of the research phenomenon.

3.2 Data Sources: The data for this research study is sourced from various primary and
secondary sources:

Secondary Data:

i. Time Series Data: Secondary data is collected from official reports and publications,
including the RBI's Annual Report, World Bank's World Development Indicators, and
other relevant sources. The time series data cover the period before, during, and after
the COVID-19 pandemic, allowing for a comprehensive analysis of the trends in
foreign exchange reserves and exchange rates.
ii. ii. Economic Databases: Data from international economic databases, such as the
International Monetary Fund (IMF) and the World Trade Organization (WTO), are
utilized to understand global economic trends and their impact on India's foreign
exchange market during the pandemic.
3.2 Data Collection Procedure: Quantitative Data: The quantitative data related to foreign
exchange reserves and exchange rates are collected from official reports and economic
databases. The data include monthly and quarterly figures for India's foreign exchange
reserves.
3.3 Data Analysis Tools: Quantitative Analysis: The quantitative data on foreign exchange
reserves and exchange rates are analysed using statistical software such as SPSS
(Statistical Package for the Social Sciences) or R. Time series analysis is performed to
identify trends and patterns in the data during the pre-pandemic, pandemic, and

24
 postpandemic periods. Descriptive statistics, including mean, standard deviation, and
percentage changes, are calculated to summarize the data. b. Qualitative Analysis: The
qualitative data obtained from interviews are analyzed using thematic analysis. The
transcribed interviews are coded, and key themes and patterns are identified. The analysis
aims to uncover insights into the impact of COVID-19 on the foreign exchange market, the
effectiveness of policy responses, and challenges faced by stakeholders.
3.5 Period of the Study:
The study is carried out from March,2023 – July,2023.

3.6 Limitations of the Study:

➢ The study is limited to very small duration.

➢ The information collected from various magazines, and the opinions of various
economists are considered some of them might not be up to the mark.

25
 CHAPTER-4
DATA ANALYSIS & INTERPRETATION

26
4.1 Secondary data: It is the second-hand information. The data that are gathered by a
secondary party other than the user himself. The common sources of the secondary data for
social science include statements, the data collected by government agencies, organisational
documents, and the data that are basically collected for other research objectives. For the Study
the secondary data is collected from various reports, magazines is used to analyse the Forex
Trends.

27
Trend of Foreign Exchange Reserves during the COVID-19 Pandemic:

Since 1991, India has experienced tremendous growth in its stock of foreign exchange
reserves. The reserves which stood at 5.8 billion US$ in the year 1991 has grown significantly
to cross the mark of US$ 500 billion in June, 2020. It has been mentioned above that, despite
of economic turmoil amidst the pandemic crisis, India‟s foreign exchange reserves shows
positive performance. However, for a short while, foreign exchange reserves of India had to
face economic distress during the COVID-19 pandemic period. A huge chunk of capital was
outflowed from the foreign exchange reserves in the late March 2020. The following diagrams
clearly show the trend of India‟s foreign exchange reserves during the pandemic period.

Figure no. 1 furnished the trend of foreign exchange reserves for a period of six months starting
from January 2020 to June 2020. On the other hand, figure no. 2 depicts the month over month
growth rate of foreign exchange reserves for two corresponding periods. It has been clearly
observed that, from the steady performance in January and February 2020, the foreign
exchange reserves in March 2020 witnessed the highest ever capital outflow of 17.33 billion
US$ since 2008 global financial crisis where reserves fell from 487.24 billion US$ to 469.91
billion US$ within a span of two weeks (figure no.1). It has also been seen from figure no. 2
that the percentage change in growth in the month of March of corresponding period moved in
the opposite direction. In March 2020, it shows negative growth rate as compared to March
2019 which shows the highest growth rate of that period. As COVID-19 has evolved as a global
pandemic, it surges the risk aversion of the Foreign Portfolio Investors (FPI) which result in

28
large capital outflow from the emerging market including India. As a consequence of capital
flight and appreciation in US$, Indian rupee depreciated significantly which forced RBI to sell
its dollar currency to defend Indian currency. After the depressing month of March, the trend
of India‟s stock of foreign exchange reserves shifted upwards and shows some positive growth
from the month of April 2020 and consistent growth upto 506.84 billion US$ at the end of June
2020. In the month of April 2020, growth has been observed due to the inflow of Foreign Direct
Investment (FDI) and lower import bills which offset the continuous outflow of FPI and selling
of dollar. However, along with FDI inflow and lower import demand in the months of May and
June 2020, FPIs gain its confidence and reinvested in the Indian stock market which spike the
stock of foreign exchange reserves to the unprecedented level of half trillion.

Reasons for increasing Forex:

One of the major reasons for the increase in reserves was the large inflow through foreign direct
investments (FDI). Net inflow of FDI in FY20 was much higher at $43 billion as against $30.7
billion recorded in FY19.

Compared to Foreign Portfolio Investments (FPI), FDI money is much more stable as it is more
long-term in nature. More FDI inflows can be considered as an expression of confidence of
foreign investors in the long-term prospects of the Indian economy.

On the other hand, the FPI fund flow can be very volatile depending on the expectations of the
financial market. While the net FPI outflow in FY20 was $3 billion, it stood at $5.5 billion in
FY19 according to the National Securities Depository Limited (NSDL). Notably, March 2020
witnessed a huge sell-off due to the coronavirus scare, recording a net outflow of nearly $16
billion. This trend continued in April and May with net outflow of nearly $2 billion and $1
billion respectively. But the good news is that, June saw a net inflow of $3.4 billion, indicating
that the worst might be behind us.

As central banks in advanced economies continue to pump cheap money, more dollars can be
expected to head to our shores which can boost the reserves further.

Another factor that contributed to the reserves is External Commercial Borrowing (ECB) by
Indian corporates. The ECB for the year 2019-20 more than doubled to $22.1 billion versus
preceding year’s $9.7 billion. As per the latest data by RBI, the domestic companies have
already raised nearly $2.5 billion in the first two months of the current fiscal.

29
But unlike FDI, this should be taken with a pinch of salt as these are debt that the companies
should pay back. However, until the external interest rate environment stays benign, offshore
borrowing could continue. The Covid-19 pandemic has made the case stronger for lower
interest rates for an extended period.

Conducive external account also helped the growth in reserves. The current account deficit
more than halved last financial year compared to the year before as the trade deficit shrank to
$157.5 billion from $180.3 billion. The reason being that imports fell faster than exports.
Interestingly, in the final quarter of 2019-20, India recorded a marginal current account surplus
of $0.6 billion.

Significantly contributing to the drop in imports were crude oil and related products and
precious metals. While the former saw a decline by about 9 per cent, the latter contracted by
16 per cent.

Looking at the latest data, India exported goods worth $19 billion in May this year compared
to $30 billion in the same month of the preceding year.

Despite the large inflow of dollars, the rupee has lost a little over 9 per cent in the last one year
against the greenback, making it one of the weakest Asian currencies. This could be due to the
RBI diverting the dollars towards the reserves. When the central bank adds dollars into its kitty
by selling the rupee, obviously the exchange rate is not going to move in favour of the Indian
currency.

Once the global economy moves towards the path of recovery, the trade deficit might go up
from levels seen in the recent months, weighing on the current account balance. However, the
potential inflow through external borrowing, FDI and FPI routes might continue to bring in
more dollars, helping reserves.

30
Statistics of Foreign Exchange Reserve: 1960 – 2023 :

• In 1960, forex reserves covered just 8.6 weeks of imports.

• In 1980, India had foreign exchange reserves of over U$7 billion, more than double
the level (U$2.55 billion) of what China had at that time.

• In 1990, forex reserves covered just 4.8 weeks of imports.

• Foreign exchange reserves of India reached milestone of $100 billion mark only in
2004.
• India was forced to sell dollars to the extent of close to US$35 billion in the spot
markets in Financial Year 2009 due to 22% depreciation in rupee (against the dollar)
in the same fiscal year 2009.

• In 2009, India purchased 200 tonnes of gold from the International Monetary Fund,
worth US$6.7bn (€4.57bn, £4.10bn).
• In June 2020, India's foreign exchange reserves crossed the US$500 billion mark
for the first time.
• In June 2021, India's foreign exchange reserves crossed the US$600 billion mark
for the first time.
• India's total forex reserves touched an all time high of US$642.453 billion on 8
September 2021.
• The reserves declined to $575.3 billion by 3 February 2023.
• India’s foreign exchange reserves have shown a positive trend as it rose by $1.853
billion to $595.051 billion in the week ended on June 30

31
Source: Statista

32
Forex On the Rise:

India’s foreign exchange reserves have shown a positive trend as it rose by $1.853 billion to
$595.051 billion in the week ended on June 30, according to the Reserve Bank of India
(RBI). However, the overall reserve had previously experienced a decline of $2.901 billion to
$593.198 billion in the preceding reporting week. Foreign exchange reserves encompasses a
wide range of assets held by a country’s central bank. These assets include physical banknotes
and coins, financial deposits, bonds, treasury bills, gold and other government securities.

➢ Foreign Currency Assets Witness an Increase

In the week ending June 30, the foreign currency assets, a significant component of India’s
foreign exchange reserves, recorded an increase of $2.539 billion to reach $527.979 billion.
This rise in foreign currency assets reflects the impact of appreciation or depreciation of nonUS
units, such as the euro, pound, and yen, held in the country’s foreign exchange reserves.

➢ Decline in Gold Reserves

India’s gold reserves experienced a decline of $472 million to $43.832 billion during the same
period, as reported by the RBI. The reduction in gold reserves indicates potential adjustments
in the central bank’s portfolio composition or other strategic considerations.

33
 ➢ RBI Committee Recommends Internationalisation of Rupee

In an effort to achieve the internationalisation of the Indian rupee, an RBI-appointed committee,

headed by RBI executive director RS Ratho, recently proposed a roadmap. The committee
emphasized that the rupee has the potential to become an international currency due to India’s
robust economic growth and resilience. The report suggests promoting the use of rupee in
international trade invoicing, settlement, and capital account transactions to enhance its global
presence.

➢ Rupee’s Recent Performance

On July 7, the Indian rupee depreciated 23 paise against the US dollar, reaching a six-week low
and logging its worst performance in seven weeks. The depreciation was driven by concerns
over potential interest rate hikes by the Federal Reserve and losses in Asian currencies. The
rupee closed at 82.74 per dollar, down from the previous close of 82.51.

➢ Factors Influencing Rupee’s Weakness

Several factors have contributed to the weakness of the Indian rupee, including expectations of
upcoming interest rate hikes, the strength of the US dollar, and rising crude oil prices supported
by OPEC production cuts. These factors have led market participants to consider the negative
impact on the rupee’s value. However, the strength of the Indian capital market has somewhat
mitigated the rupee’s fall.

34
India’s position in world economy with respect to Forex:

India’s foreign exchange reserves log fastest pace of growth since August 2021 after rising by
a whopping $14.72 billion

India's foreign exchange stockpile recorded the biggest ever weekly increase in the period
ended November 11, with a record $14.7-billion surge reflecting the impact of an estimated $8
billion worth of recent overseas currency purchases by the central bank amid rising global
appetite for local growth assets.The reserves had climbed $16.7 billion in the week ended
August 27, 2021, but those additions included $12.6 billion worth of one-time Covid
restructuring support from the International Monetary Fund (IMF).

"Select investment flows to corporates in India, coupled with a falling dollar index, triggered
this surge in forex reserves," said Bhaskar Panda, executive V-P, HDFC Bank. "Excess flows
were sterilised, which helped shore up the depleting forex reserves. Such a move should help
the rupee gain stability." Forex reserves, including gold and special drawing rights (SDR) of
the IMF, are at $544.8 billion as of November 11.While the value of hard foreign currency
assets rose $11.8 billion, that of gold climbed $2.6 billion. ET reported Friday that the dollar
equivalent of about Rs 32,000 crore, or $4 billion, of the increase could be attributed to the
central bank's dollar purchases from the market. Revaluation of non-dollar assets in the
reserves, too, could have helped boost the stockpile as the dollar index headed south over the
35
past couple of weeks. Another indicator that the RBI actively bought dollars is the rupee's
muted appreciation against the US currency. The rupee climbed 2.3% between October 21 and
November 11, compared with gains of 9.2% for the South Korean won and 6.7% for the Thai
Baht.The rupee did not gain as much as other Asian or EM peers in the last few weeks with the
falling dollar Index," said Anindya Banerjee, currency analyst, Kotak Securities. "This was a
wise move by the central bank. It puts India in a better position to navigate any future currency
crisis." The RBI had sold a net of $10.3 billion in the spot market and another $9.7 billion in
the forwards market in September to ensure the rupee's stability, the latest RBI data showed.
But the trend is likely to reverse in October as the central bank started buying dollars from the
market. Also, dollar demand could be tempered due to the recent softening in global crude and
commodity prices. The latest monthly inflation print in the US was more benign than
anticipated, fuelling expectations that the pace of Federal Reserve's future rate increases will
be more sedate. Such expectations have hauled US equity gauges from 52week lows, setting
the stage for growth asset rallies across continents.

36
Components of Forex:

The Reserve Bank of India's (RBI) foreign exchange reserves, also called forex reserves, refers
to the assets the central bank holds to provide import cover and protect against external shocks.
The reserves are accumulated on an ongoing basis and variations occur as a result of the RBI's
market operations. The four components of forex reserves are foreign currency assets, gold,
special drawing rights and the reserve position in the International Monetary Fund. As on July
2, India's forex reserves stood at a record high of $610 billion, of which $566.99 billion was in
the form of foreign currency assets and $36.37 billion was in the form of gold.

37
 CHAPTER-5

FINDINGS, CONCLUSION & SUGGESTIONS

38
Findings:

The research findings reveal significant insights into the impact of the COVID-19 pandemic
on India's foreign exchange reserves. The analysis of time series data and qualitative insights
from interviews shed light on the challenges faced by India's foreign exchange market during
the crisis and the effectiveness of policy responses in managing foreign exchange reserves. The
key research findings are as follows: Foreign Exchange Reserves Trends: India's foreign
exchange reserves experienced fluctuations during the COVID-19 pandemic. The reserves
initially declined due to heightened risk aversion and capital outflows. However, the
government's and RBI's policy interventions, including liquidity support and forex market
interventions, played a vital role in stabilizing foreign exchange reserves and restoring
confidence in the currency. Exchange Rate Volatility and Policy Responses: The Indian Rupee
faced significant volatility during the pandemic, initially depreciating due to risk aversion and
capital flight. The RBI's proactive interventions in the foreign exchange market helped curb
excessive exchange rate fluctuations and provided stability to the currency. The managed float
exchange rate system, coupled with liquidity-enhancing measures, enabled effective exchange
rate management during the crisis.

India’s foreign exchange reserves have shown a positive trend as it rose by $1.853 billion to
$595.051 billion in the week ended on June 30, according to the Reserve Bank of India (RBI).
The four components of forex reserves are foreign currency assets, gold, special drawing rights
and the reserve position in the International Monetary Fund. As on July 2, India's forex reserves
stood at a record high of $610 billion, of which $566.99 billion was in the form of foreign
currency assets and $36.37 billion was in the form of gold. India is at top 4th position in Forex
compared to other countries.

39
Conclusion:

The rising trend of India‟s foreign exchange reserves during the COVID-19 pandemic crisis
was a blessing in disguise for the country. It increases the rating of India‟s external sector in
the global market. It depicts that the country has greater capacity to stabilise the exchange rate
and to pay external liability as and when falls due. The study revealed that in the month of
March 2020, there has been seen a huge decline in the foreign exchange reserves. But in the
succeeding month, the country has bounced back strongly and reached the remarkable position
of holding half-trillion US$ of foreign exchange reserves. The different measures of estimating
adequacy level of reserves showed that the country hold reserves more than the adequate level.
If any particular shock affects the economy, then it has a greater capacity to absorb the shock.
In more extreme situations, if the entire economy goes into depression and there is a sudden
stop of foreign capital inflow, then also the country has sufficient reserves to endure the shock
for certain periods. On the other hand, the holding of excess reserves has its own cost, hence it
must be managed in such a way that maximum benefit can be achieved at minimum cost. One
such option is to use the excess level of reserves for greater economic benefit. The government
should take the advantage to use the excess level of reserves for the economic development of
the nation wherever it is required before the opportunity gets lost. If the government want to
retain its stock of reserves for the emergency fund then it must ensure sustainable growth of
foreign exchange reserves.

Maintaining adequate or optimal level of reserves ensures avoidance of unnecessary high costs
of sterilization and central bank balance sheet risks. Acquiring reserves may look quite
attractive and may be easy, but acquiring such high levels that leads to excess holding may
hamper the growth of a country as these resources have very few uses. Therefore in order to
avoid certain costs, a country should maintain optimal levels of reserves. Holding excess
reserves may lead to a huge inflow of funds in an economy leading to increase in money supply
which in turn will lead to an inflationary situation. In order to avoid such inflationary scenario,
governments or central banks often intervene in the foreign exchange markets to control their
currency to appreciate. This is basically done through sterilization which has high fiscal costs
and may also lead to certain future imbalances in a country. Also, as reviewed through various
studies, we found that the major source of foreign exchange reserves is through Foreign
Portfolio Investments (FPI) and Non-Resident Deposits (NRDs). These sources of reserves

40
seem to be the most volatile capital as it is temporary in nature. On the other hand Foreign
Direct Investments (FDI) is still a better source of foreign exchange reserves as they are more
stable. FPIs and NRDs may drastically affect a country‟s BOP (Balance of payments) and can
also lead to macroeconomic imbalances. It is because of this reason that most of the developing
and emerging economies do not allow for full capital account convertibility. Accumulating
reserves at a very high level also hinders the working of the government and monetary
authorities as they have to make tradeoff between their exchange rate policy and monetary
policy, so it can be said that accumulation of high reserves affects the monetary policies of a
country. So, at last we conclude that a country should adopt certain criteria for determining the
adequate level of foreign exchange reserves keeping in mind the risks and costs of holding
them.

India’s foreign exchange reserves have shown a positive trend as it rose by $1.853 billion to
$595.051 billion in the week ended on June 30, according to the Reserve Bank of India (RBI).

A balanced diet is essential for the balanced development of the body. Likewise a continuous
development of all the sectors is necessary to achieve growth rate and to reduce poverty. The
present growth pattern which essentially creates jobless growth is not conducive for a country
like India which has more than130 crores of population. Foreign exchange reserve does not
bring any developmental activities and export orientation in secondary sector as well as service
also. If effective remedies are taken to solve foreign exchange reserve management defects.
This chance of India brings a giant global economy is likely decades to come.

41
Suggestions:

The government instead of accelerating huge reserves, it should use it in improving the exports
in order to avoid huge deficit in the current account balance in the balance of payments. The
foreign exchange reserves are composed of foreign funds borrowed from abroad, especially
volatile hot money. Portfolio investment can easily flow out after garnering speculative profits
from trading Indian stocks and shares. So the government should look for poorer mix, which
can avoid volatility. The huge foreign exchange reserves have facilitated full convertibility of
the rupee, in the current account, which has created opportunity for investing Indian capital
abroad. In a country with enormous need for investment to setup production of goods and
services and for building infrastructure facilities in the country, the first call on wherever capital
is available or can be mobilized, must be in favour of domestic investment. Although the huge
foreign exchange reserves has helped in maintaining stability in the exchange rate, another
problem of inflation has aroused which might be more dangerous than the benefits of holding
the reserves. So, it will be quite prudent for the government to keep check on inflation as the
reserves are amounting.

42
Recommendations:

Based on the research findings, the following recommendations are provided for policymakers
and stakeholders to navigate the post-pandemic economic landscape and strengthen India's
foreign exchange market:

Safeguard Foreign Exchange Reserves: Given the uncertain global economic environment, it
is essential for India to maintain adequate foreign exchange reserves to withstand external
shocks. Policymakers should continue to adopt prudent reserve management practices and
build sufficient buffers to protect against potential volatility in capital flows and exchange rates.
Strengthen Trade Competitiveness: Enhancing India's export competitiveness is critical for
achieving a more balanced trade position. Policymakers should focus on supporting export-
oriented industries, promoting value-added exports, and diversifying export markets to reduce
dependence on specific regions.

Attract Foreign Direct Investments (FDI): Attracting FDI can provide a stable source of foreign
capital and support economic growth. Policymakers should create an attractive investment
climate, streamline regulations, and focus on sectors that align with India's growth priorities to
attract more FDI inflows. Invest in Digitalization: The pandemic accelerated the adoption of
digital payment methods. Policymakers should continue to invest in digital infrastructure and
promote digitalization across various sectors to increase efficiency, transparency, and ease of
doing business.

Strengthen Crisis Management Framework: The COVID-19 pandemic highlighted the

importance of a robust crisis management framework. Policymakers should review and
strengthen crisis management tools, including foreign exchange interventions and monetary
policy measures, to respond effectively to future economic challenges. Enhance Policy
Coordination: Effective policy responses require coordination between fiscal and monetary
authorities. Policymakers should ensure seamless coordination between the government and
the RBI to address economic challenges and maintain macroeconomic stability.

43
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44
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