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The purpose of this research is to explore ways in which excess foreign exchange reserves can be effectively used in the Indian foreign exchange scenario. The research is based on the voluminous literature available on foreign exchange and the Indian economy. A discussion as to how the dynamic scenario in the economy has had an influence on the policies is initiated. The research endeavors to recommend possible ways to determine what the optimum reserve holdings should be. A look at different economic models and subsequent application to the Indian situation is made. A more proactive role for the central bank in managing foreign exchange reserves is suggested. Some of the important questions raised in this research are: Why do countries hold reserves? What are the motives behind this tendency to hoard reserves? What is an optimal level of reserve holdings? What are the reasons for the spurt in the Indian reserves position? Is India holding "excess" reserves? Can they be invested for higher returns? What role should the central bank play in managing forex reserves? What is the Indian central bank doing to address this situation? The paper is organized as follows. The first section discusses what is meant by foreign exchange reserves. Why do countries hold reserves and what are the motives behind this hoarding of reserves? The discussion then turns towards determining an optimum level of reserves with the help of existing models. The main finding is that the forex position in India is higher than it should be. The final section proposes various possibilities of investing these "excess" reserves in pursuit of higher returns; the role of the Reserve Bank of India (the central bank) is discussed in brief. The research discusses the possibilities of using these reserves for infrastructure purposes and in turn strengthening the internal dynamics of the Indian economy.
A Thesis Submitted to the Program in International Affairs in Partial Fulfillment of the Requirements for the Degree of Master of Science.
Includes bibliographical references.
James Cobbe, Professor Directing Thesis; Lee Metcalf, Committee Member; Stefan Norrbin, Committee Member.
Florida State University
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