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?”.

According to the study, as against the optimal reserves of about US$175 billion towards the close of 2007, India’s forex reserves totalled around US$250 billion and continued to swell. The reserve buildup, the study said, has reduced external vulnerabilities in all emerging market economies in Asia and helped in maintaining financial stability in the region as a whole.

Capital flows

“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 report said.
“The average optimal level of reserves for Asia is estimated at around six months of imports, twice as large as the traditional benchmark (three months). Estimated optimal ratios for Indonesia, India, China, and Taiwan Province of China are above six months”, the study added.