Abstract The volatility of reserve increment and opportunity cost of reserve holding play prime role in models of reserve demand. However, skewness in the data on incremental reserve produces bias in coefficient estimates and instability in reserve demand function when volatility is measured as rolling standard deviation of reserve increment. In contrast, a model based volatility measure eliminates bias, but does not provide evidence to support the claim that high cross-border capital flows significantly impacted reserve demand. The asymmetric control over capital flows and asymmetric intervention in favour of strengthening export competitiveness in an era of persistent capital inflows seem to be responsible for large stockpile of reserves.