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Authors: Anupam Mehrotra
Published by: Amity Research Centers
Published in: 2019
Length: 15 pages
Data source: Published sources

Abstract

From the perspective of Reserve Bank of India (RBI), country's central bank, the domestic liquidity conditions were driven chiefly by autonomous factors such as currency in circulation, government cash balances and foreign exchange flows. While currency in circulation and government cash balances had a bearing mostly on domestic liquidity conditions and ultimately on interest rates, foreign exchange flows were also expected to have an impact on the exchange rate and the real economy. In the modern globalised world, volatile capital flows posed significant challenges to liquidity management and the conduct of monetary policy. This had pushed the RBI to absorb the excessive inflows at times and to augment the flow of foreign currencies into market in a bid to neutralise the outflow, and, at other times, to retain monetary control. However, in closely inter-connected economies, the operations of the RBI in the open market to stabilise exchange rates in the case of excessive inflows or outflows were frequently seen as ineffective. However, the RBI still intervened in the hours of extreme volatility to even out spikes on the currency graph and restore business confidence, in general. But such interventions came at a cost which could be justified only when effectiveness of such intervention could be established clearly. Could RBI intervene enough to stem Indian rupee plunge against the US dollar? And would the actions of the RBI help revive the dip in confidence levels or would its intervention in the foreign exchange market prove ineffective yet again, in terms of the volume and velocity of the capital flows?

Teaching and learning

This item is suitable for undergraduate, postgraduate and executive education courses.

Time period

The events covered by this case took place in 2019.

Geographical setting

Region:
Asia
Country:
India

Featured company

RBI
Employees:
10000+
Type:
Government agency
Industry:
Banking

About

Abstract

From the perspective of Reserve Bank of India (RBI), country's central bank, the domestic liquidity conditions were driven chiefly by autonomous factors such as currency in circulation, government cash balances and foreign exchange flows. While currency in circulation and government cash balances had a bearing mostly on domestic liquidity conditions and ultimately on interest rates, foreign exchange flows were also expected to have an impact on the exchange rate and the real economy. In the modern globalised world, volatile capital flows posed significant challenges to liquidity management and the conduct of monetary policy. This had pushed the RBI to absorb the excessive inflows at times and to augment the flow of foreign currencies into market in a bid to neutralise the outflow, and, at other times, to retain monetary control. However, in closely inter-connected economies, the operations of the RBI in the open market to stabilise exchange rates in the case of excessive inflows or outflows were frequently seen as ineffective. However, the RBI still intervened in the hours of extreme volatility to even out spikes on the currency graph and restore business confidence, in general. But such interventions came at a cost which could be justified only when effectiveness of such intervention could be established clearly. Could RBI intervene enough to stem Indian rupee plunge against the US dollar? And would the actions of the RBI help revive the dip in confidence levels or would its intervention in the foreign exchange market prove ineffective yet again, in terms of the volume and velocity of the capital flows?

Teaching and learning

This item is suitable for undergraduate, postgraduate and executive education courses.

Settings

Time period

The events covered by this case took place in 2019.

Geographical setting

Region:
Asia
Country:
India

Featured company

RBI
Employees:
10000+
Type:
Government agency
Industry:
Banking

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