Monetary Policy & the Behavior of Foreign Exchange Reserves of India

Abstract

This paper sheds light on the actual impact of monetary policy on Foreign Exchange Reserves and thereby addresses its role as a determinant of commonality in liquidity. To capture e?ects of change in CRR, SLR, Repo rate and Reverse Repo rate on Foreign Exchange reserves, we applied Regression Analysis. Our results suggest that an increase in CRR and Repo Rate will lead to increase in Total Reserves and Increase in SLR will lead to decrease in Total Reserves. These ?ndings are related during the period of April 2006- March 2013.

Keywords: Cash Reserve Ratio, Statutory Liquidity Ratio, Repurchase Rate, Reverse Repurchase Rate, Foreign Exchange Reserve.