Foreign Exchange Reserves and Currency Movements: An Empirical Analysis of Major INR Exchange Rates

Abstract

Foreign exchange reserves play a vital role in maintaining economic stability, managing exchange rate volatility, and strengthening investor confidence in emerging economies. India, as one of the world's fastest-growing economies, has accumulated substantial foreign exchange reserves over the past decade. This study examines the impact of India's foreign exchange reserves on the exchange rates of four major currency pairs: USD-INR, GBP-INR, EUR-INR, and INR-JPY during the period 2021–2025. The research employs descriptive and analytical methodologies using secondary data obtained from the Reserve Bank of India (RBI), International Monetary Fund (IMF), and foreign exchange market reports. The study analyses reserve movements and corresponding exchange rate fluctuations to understand the relationship between reserve accumulation and currency stability. Findings indicate that higher foreign exchange reserves contributed significantly to reducing exchange rate volatility and strengthening market confidence. However, external shocks such as global inflation, geopolitical tensions, and monetary policy changes in developed economies also influenced exchange rate movements. The study concludes that while foreign exchange reserves are an effective tool for exchange rate management, they cannot completely shield a currency from global economic disturbances.