Should India Add More Gold to Its Foreign Exchange Reserves?

Abstract

India's accumulation of foreign exchange reserves has been unprecedented scale in recent years. Given the cost of holding huge foreign exchange reserves, the cost of holding these reserves is also on the increase. The source of accretion to the foreign exchange reserves is mainly the capital flows and is portfolio flows more recently. Hence, given the cost and the volatility of the capital flows which is the main source of accretion, India needs to decide on the composition of its foreign exchange reserves. Central banks of many of the countries are considering the re-engineering of their foreign reserves. The share of gold in the total foreign exchange reserves is very high in the US and in the Europe. But, the Asian economies hold a very low proportion of their foreign exchange reserves in gold. This paper analyses the trends in the accumulation and sources of accretion of Indian foreign exchange reserves from the view point of if India should increase its gold holdings.

Keywords: Foreign Exchange Reserves, Capital Flows, Balance of Payments

JEL Classification: F31