Thus, the need for adequate reserves is unlikely to be eliminated or reduced even if exchange rates are allowed to float freely. The overall approach to the management of India’s foreign exchange reserves in recent years has reflected the changing composition of balance of payments, and has endeavoured to reflect the “liquidity risks” associated with different types of flows and other requirements.
These changes recognize that regulatory burden arises not only from the direct operational costs of compliance, but also from the indirect costs of delayed or lost opportunities to enter new activities.