In this regard, it is necessary to view the concept of “excess reserves” from several angles, including from the perspective of possible real sector shocks to the current account and the nature of capital flows. India is vulnerable to shocks on account of oil price and fluctuations in food grains production, which is still largely dependent on monsoon conditions.
Additionally, a large part of the capital flows are portfolio flows and a significant component of Foreign Direct Investment is in the nature of private equity or for acquisition of existing firms and not in greenfield projects. In a sense, therefore, capital account shocks, which would be independent of the economic fundamentals of the country or domestic macroeconomic environment, cannot be fully ruled out.