Journal Press India^®

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This study examines to identify the macroeconomic determinants of foreign exchange reserves in India for the period 1995 to 2018. Vector Error Correction Model (VECM) is used for analysing the exact impact of foreign exchange reserves and macroeconomic variables in India. Augment Dickey-Fuller (ADF) is used for testing the stationary properties of the data and Akaike Information criteria (AIC) is applied to determine the optimal lag length of the model. Foreign direct investment (FDI), foreign portfolio investment (FPI) and exports have a positive impact on foreign exchange reserves whereas imports and exchange rate volatility have a negative impact on foreign exchange reserves in India in the long run. In the short run FDI, FPI and exports are statistically significant variables causing variation in foreign exchange reserves, while imports and exchange rate are statistically insignificant variables, having no impact on foreign exchange reserves in India. Since Error Correction Term (ECT) is found to be negative and significant, it can be said that there is long-run causality running from macroeconomic variables to foreign exchange reserves in India. If disequilibrium exists in the system, then ECT corrects such disequilibrium and provides guidance to variables of the system to come back towards equilibrium at the speed of 62 percent.

Keywords

Foreign exchange reserves; Foreign direct investment; Exports; Imports; Error correction term; India

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