First, the two way movement shows that we have a flexible exchange rate, and also evidences the increasing flexibility of the rate over time in relation to the magnitude of flows. 16. Second, India does not have a deliberate strategy of building up reserves for “self-insurance”.
The variations in our foreign exchange reserves are an offshoot of our exchange rate policy which is to intervene in the market only to smooth exchange rate volatility and prevent disruptions to macroeconomic stability. Third, even as our reserves got built up over the years owing to capital flows, the same reserves have been used to contain volatility in the event of capital reversals.