In some quarters, the Reserve Bank of India has been accused of resisting rupee appreciation through active exchange rate interventions and thus worsening inflation. While liquidity explosion becomes the logical corollary of the RBI's exchange rate management, the latter does not seem to have a strict correspondence with the emergence of recent inflationary pressures. In the face of the dollar's weakness and perennial capital inflows, the RBI has accomplished a balancing act of stabilising the real effective exchange rate and not allowing the nominal exchange rate to move according to the dictates of speculative global finance.
