Massive interventions by the Reserve Bank of India (.
Forex market interventions during surges in capital flows to contain the INR volatility lead to an increase in money supply or M3, which is found to be neither inflationary nor elicit a policy rate response by the RBI, according to the research paper published under the RBI working paper series.
Consequently, an increase in the policy rate to address inflationary pressures may invite further yield-seeking capital flows.
This may constrain the operation of monetary policy, it said.
“However, sterilisation has quasi-fiscal costs by driving down seigniorage when higher-yielding assets are replaced by lower-yielding ones.
The preliminary assessment by the authors suggests that even during times of foreign exchange market intervention by RBI, there has been low and stable inflation in the country.
TAGSbank of indiaexchange rate regime.