Open Access
American Research Journal of Business and Management
ISSN (Online): 2379-1047
DOI: 10.46568/arjbm
Capital Flows, Forex Intervention, and Monetary Policy Independence: The Case of India
Abstract
The rise and ebb of capital flows has buffeted the Indian economy. The Reserve Bank intervenes in the foreign exchange
market to smoothen the volatility. Against this backdrop, this paper studies the management of exchange rate volatility
and also the sterilisation of the surplus liquidity generated from the RBI intervention. With the adoption of flexible
inflation targeting, liquidity management operations have undergone modification. In this context, this paper examines
the effectiveness of sterilisation operations in this period. With the application of two-stage least squares, this paper finds
out that the effectiveness of sterilisation operations has remained intact in this period, indicating that monetary policy
independence is being maintained in the Indian economy.
