On the whole, under present conditions, it seems that the “cost” of additional reserves is really a non-issue from a broader macro-economic point of view. Indian interest rates have come down substantially in the last three or four years. They are, however, still higher than those prevailing in the U.S., Europe, U.K. or Japan.
This provides an “arbitrage” opportunity to holder of liquid assets abroad, who may take advantage of higher domestic interest rates in India leading to a possible short-term upsurge in capital flows.