Impact of Economic Growth and Trade Openness on Foreign Exchange Reserves in Indian Economy

The present study analyses empirically the effect of economic growth and trade openness on international reserves in India. The study employed time series data with annual frequency from 1996 to 2016. The study developed an econometric model relating RES to ECON and TRDOP variables and used logarithmic transformation of the variables for econometric estimation. The econometric tools such as Augmented Dickey-Fuller (ADF) test, Johansen co integration test and vector error correction model were applied. The co integration test results suggest that there is an existence of a stable long-run equilibrium relationship among the variables. The vector error correction model (VECM) of international reserves reveals that lagged independent variables shows the expected signs i. e. economic growth and trade openness have significant effect on international reserves. Findings of the study suggest that economic growth and trade opennessis positively related to international reserves. This implies that the authorities of Indian economy have to involve more actively in foreign reserve management practices.