India's Foreign Exchange Reserves - Are we selling our resources and services for a currency of diminishing value?
THE RBI Governor D. Subba Rao was asked a question, “Should India continue to accumulate USD and follow US interest rate policies? In the name of earning export dollars, maybe we are selling our resources and services for a currency of diminishing value. ”
Subba Rao replied:
To deal with sudden stops and reversals of capital flows, a certain level of foreign exchange reserves is necessary. However, India does not have a policy of actively accumulating reserves as a measure of self-insurance. Any accumulation of reserves is partly an incidental by-product of our exchange rate policy which is to check undue volatility in the foreign exchange market so that the exchange rate reflects the underlying macroeconomic fundamentals. Incidentally, the increase in our reserves also reflects valuation changes.
In this context, it is also important to note that our foreign exchange reserves comprise not just dollars but also other hard currencies such as the euro and the sterling pound [and] also gold.