The basic purpose of maintaining high forex reserves has been to avoid a BoP crisis such as the one seen in 1990-91 and to tide over shocks such as the Asian currency crisis in 1997-99, says Anand Anchan, President, Global Trust Bank.

In 1990-91, India was virtually staring down the barrel of a gun when its foreign exchange reserves fell to $585 mn, barely sufficient to meet one week's imports. Under pressure from International Monetary Fund (IMF), it had to liberalize its foreign exchange policy. The RBI also took a decision to ensure comfortable reserves at all times. The results are there to see as today, India has foreign exchange reserves of more than US$118 bn. The basic purpose of maintaining such reserves has been to avoid a BoP crisis such as the one seen in 1990-91 and to tide over shocks such as the Asian currency crisis in 1997-99. The primary objective is to curb volatility in the currency and interest rate markets as it hampers growth of the economy. Apart from this, the RBI has to consider the country's export competitiveness. While most of the other Asian region countries practise a fixed exchange rate, India has a relatively flexible exchange rate system. Therefore, whenever the rupee appreciates against foreign currency, it hurts the exporters. Therefore, RBI has to step in and buy foreign currency. It must be admitted that RBI has done a brilliant job of maintaining a fine balance in managing interest rates, exchange rates and money supply.

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