The Cost of Holding Excess Reserves: Evidence from India

Abhijit Sen Gupta, Jawaharlal Nehru University

Abstract

Most of the existing literature has used single reserve adequacy measures to evaluate the volume of excess reserves. In this paper, we employ empirical methods to identify an international norm of reserve adequacy, incorporating the various objectives of holding reserves. We then compare the actual reserve accumulation experience of various emerging markets with this international norm predicted by our empirical model. We find that India has been holding reserves in excess of the international norm, and we calculate the cost of holding these excess reserves by looking at three different alternative uses of resources. We find that India is foregoing as much as 1.6% of its GDP by holding excess reserves in low yielding foreign bonds instead of employing resources in alternative uses.