India has registered trade and current account deficits in the recent years owing to high import bill, especially oil dependence. Technology service exports and remittances, which have been somewhat resilient to global cues, have cushioned the current account. The capital account is mainly buoyed by debt-creating inflows, portfolio inflows and external borrowings, which have taken a hit from global liquidity crunch. However, India has adequate foreign exchange reserves to finance the current account and external debt liabilities. India's central bank has built large foreign exchange reserves due to a capital account surplus, mainly debt-creating hot inflows, since it runs a deficit on the current account. This is unlike other Asian countries who have built reserves based on current account surpluses. The reserves satisfy the reserve adequacy requirements. Given the volatile nature of these hot inflows, the central bank is reluctant to use these reserves to set up a sovereign wealth fund. In 2008, a small fraction of the reserves were used to set up an offshore fund to finance infrastructure development. Despite some diversification in the recent years, the central bank has been risk averse and has mostly invested in U.S. dollar assets, and in securities and deposits with central banks, BIS and the IMF.
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