Central banks of emerging markets in Asia started making large stocks of forex reserves especially after the financial crisis of Asia (1997-98). Now the question is, whether they need to keep so much of reserves or not. Experts who are against keeping so much of reserves are of the opinion that, since most of them are invested in US Treasury bills, the return is very low. Therefore, opportunity cost of maintaining a large reserve is very high. They also argue that, instead of investing the forex reserves in the US Treasury bills, reserves can be utilized in high-yielding and high-risk assets. The risk factor can be ignored given the huge amount of reserves. The potential return from these projects would have been higher. On the other hand, supporters of the high forex reserves argue that low forex reserves may lead to devaluation of the currency which, in turn, might lead to financial crisis in the emerging markets. The foreign currency loan repayment and import become costly when the currency depreciates against foreign currency. This book is a unique attempt to capture the reasons and implications of the substantial increase of foreign exchange reserves of these economies. Particular emphasis is laid on analyzing the opportunity costs of holding such reserves and possible utilization of such reserves so as to obtain higher returns from them. Therefore, foreign exchange reserves are now not only for ‘self-insurance’ but also as an instrument for profitable investment for Asian economies.
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