Second, in the recent period, the enduring strength of foreign exchange inflows has complicated the conduct of monetary policy, as such inflows can potentially reduce the efficacy of monetary policy tightening by expanding liquidity. Third, in India, levels of livelihood of large sections of the population are inadequate to withstand sharp financial fluctuations, which impact real activity.
Accordingly, monetary policy has to also bear the burden of protecting these segments of the economy from volatility in financial markets often related to sudden shifts in capital flows. Fourth, a situation in which aggregate supply is less than elastic domestically imposes an additional burden on monetary policy.