Macroeconomic drivers of foreign exchange reserves: evidence from South Asian economies

This study examines the macroeconomic determinants of foreign currency reserves in South Asia, focusing on Bangladesh, India, Pakistan, and Sri Lanka from 2004 to 2023. Using a dynamic panel econometric framework, the analysis accounts for cross-sectional dependence, slope heterogeneity, and mixed order of integration to ensure robust inference. The Pooled Mean Group Autoregressive Distributed Lag (PMG‑ARDL) model reveals that remittances and foreign direct investment (FDI) have significant long‑term positive effects on reserves, while GDP growth, real interest rates, and inflation exert negative influences. Exchange rates and reserves share a stable long‑run equilibrium, although short‑term volatility disrupts this relationship. Dumitrescu‑Hurlin causality tests confirm bidirectional causality between reserves and remittances, and a unidirectional link from FDI to reserves. Robustness checks (GLS, DKSE, PCSE) validate these findings. Overall, reserves serve both as buffers against external shocks and as catalysts for economic stability and growth.