Abstract

This study examines the relationship between India’s foreign exchange reserves and the
volatility of the USD/INR exchange rate during 2000–2024. Using annual data sourced from
the Reserve Bank of India, the research applies regression analysis to assess whether reserve
accumulation impacts exchange rate behavior. The empirical results indicate a strong and
statistically significant positive association, with reserves accounting for over 80% of the
variation in exchange rate movements. By extending the analysis through 2024, the study
incorporates the effects of major global disruptions, including the global financial crisis (2008–
2009), the taper tantrum (2013), the COVID-19 pandemic (2020–2021), and the Russia–
Ukraine conflict (2022–2024). The evidence highlights the role of reserves in enhancing
resilience and mitigating volatility during periods of heightened uncertainty. Overall, the
findings enrich ongoing policy discussions by reaffirming the stabilizing function of foreign
exchange reserves, while also drawing attention to the importance of effective management to
balance stability with the potential costs of holding large reserve stocks.