For example, India’s foreign exchange reserves stood at $ 292 billion in mid-May 2013, even that level was perhaps considered inadequate by international investors and markets. Fourth, capital outflows in a way reflect an imbalance in terms of surge in demand for foreign currency vis-à-vis domestic currency.
Hence, the price of domestic currency needs to go up to provide some defence against capital outflows, though it may have adverse impact on growth. Accordingly, monetary tightening becomes a standard response. Fifth, in the event of a shock, external stability takes precedence over domestic objectives. In such situations, there is no single instrument to address the challenge.