New Delhi: India’s foreign exchange reserves at around $286 billion are much above the optimal level according to a recent IMF study, pointing out that forex accumulation has reduced external vulnerabilities and decreased the risk of financial contagion.
India ranks among the other major emerging Asian nations like China, Hong Kong, Korea, Taiwan and Thailand which have accumulated excessive foreign exchange reserves, said an IMF working paper on “Are emerging Asia’s reserves really too high?”.
“Among the important Asian countries which have near optimal foreign exchange reserves include Singapore, Philippines and Indonesia,” it said.
According to the IMF study, as against the optimal reserves of about $175 billion towards the close of 2007, India’s forex reserves totalled around $250 billion and continued to swell.
According to the study, “The reserve buildup has reduced external vulnerabilities in all emerging market economies in Asia and helped in maintaining financial stability in the region as a whole.”
“Not only are individual economies better prepared to weather a sudden stop of capital flows, but the risk of financial contagion in the region may have decreased as a result of the reserve accumulation”, the IMF report said.
The study on foreign exchange reserves, which is based on different parameters and ratios like reserves to months of imports, reserves to broad money supply, reserves to GDP, reserves to short-term debt and reserves to total foreign exchange liabilities, showed that India is holding more than optimal reserves on all counts.