An Empirical Analysis of Macroeconomic Variables Affecting Foreign Exchange Reserves Accumulation in India

Abstract

This paper investigates the determinants of foreign exchange reserves in India by using Auto Regressive Distributed Lag (ARDL) model during 2000:Q1 to 2014: Q4 by using the variables such as foreign exchange reserve, nominal exchange rate, inflation, current account deficit, trade openness and short term debt/GDP. We found that in the long run, variables such as inflation and short term external debt/GDP affects the foreign exchange reserves. One percent increase in inflation reduces the foreign exchange reserves by 0.12% where as one percent increase in short term external debt/GDP increases the foreign exchange reserves by 0.46%. On the other hand, in the short run, exchange rate affects positively foreign exchange reserves of India.