India’s foreign exchange reserves are at an all time high of US$ 360 billion equivalent due to prudent management. There are definite benefits associated with higher reserves, such as a cushion against global shocks and enhanced confidence in the currency. But there are also considerable costs, primarily the fiscal cost of sterilization and a possible crowding out of domestic activity over time. Will this be enough to survive any prolonged period of stress? There is no one right answer, but higher levels provide greater safety from external shocks.
- 22 Jul 2015