Forex reserves, in the developing countries have raised fourfold, since 1990, to almost 30% of their GDP amounting to eight months of their import bills, yet they remain less than 5% of the developed countries. This continuous accumulation provides greater liquidity,transparency and some protection against financial crisis. This article discusses the relevant issues.

Foreign exchange (Forex) reserves in India are there to meet a defined set of objectives of the country. In the recent years, much more attention has been paid to manage the forex reserves. The reasons could be due to the emergence of euro as an alternate currency to dollar, changes in the exchange rate regimes, the changing perception on adequacy of reserves and their role in managing crisis, and the operational use of reserve targets while bridging the financing gaps by the International Monetary Fund (IMF). Besides, there are various other reasons like increase in the transparency and accountability at various levels.

Starting from 1991, the growth of foreign exchange reserves in India has been phenomenal. The reserves, stood at US$5.8 bn at end-March 1991 and gradually rose to US$25.2 bn by end-March 1995. Later in the second half of 1995, the reserves continued to surge with the growth reaching the level of US$38.0 bn by end-March 2000. Subsequently, the reserves further rose to US$76.1 bn by end-March 2003, US$113.0 bn by end-March 2004, US$141.5 bn by end-March 2005 and further to US$151.6 bn by end-March 2006 (See Chart 1).

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