In practice, policy makers should make judgements on (a) the difficulties in reviving confidence once it starts getting eroded; (b) the focus of market participants on incremental changes more than total size; and (c) demonstration of willingness to use the reserves when warranted without committing to do so and getting locked into a straight jacket situation.
The issue of managing the level of reserves thus becomes, in many ways, as important as the level itself. Secondly, there are judgements involved in assessing whether the level of forex reserves provides comfort in the face of some weakness in domestic fundamentals.