India witnessed a dollar deluge in the last few months. This had more to do with a compression of the values of imports than with a large inflow of capital of different kinds.
And, the Reserve Bank of India (RBI) managed exchange rate stability by increasing its foreign exchange reserves (hereafter, reserves) by a whopping $56.8 billion in five months. Should that be the policy more generally? More often than not a dollar deluge is primarily due to a sudden and large capital inflow, and not a compression of imports. If the RBI increases its reserves, the country incurs an opportunity …
