Suryashis Ghosh

This paper evaluates whether India’s foreign exchange reserves, now exceeding $700 billion, are economically optimal rather than merely adequate. Using quarterly data from 2000Q1 to 2025Q4, we estimate a long-run reserve demand equation via Dynamic OLS and calculate the welfare-maximizing reserve level using the Jeanne and Rancière framework, calibrated with crisis probabilities from an asymmetric complementary log-log model. We find that India’s actual reserves have exceeded the optimal benchmark in every sample quarter, with excess holdings reaching $145.02 billion by 2025, or $190.70 billion once the Global Financial Safety Net is incorporated. We further show that a two-tranche reserve management framework, separating a core liquidity buffer from a dedicated sovereign wealth fund, would have generated $344.58 billion in cumulative wealth over 2004 to 2025 against $140.80 billion under the status quo, at an annual fiscal cost of holding reserves of roughly $15 billion in 2025 alone. These findings suggest that India’s reserve accumulation strategy, while historically prudent, now imposes a quantifiable and avoidable fiscal drag that structural reform could substantially mitigate.