In principle, therefore, it would be nice if an alternative viable exchange rate management system could be put in place which would avoid excessive build-up of reserves and domestic liquidity and, at the same time, maintain India’s external competitiveness with low inflation and low interest rates. In theory, each of the above alternative approaches has some merit.
However, it is not entirely clear that they can be put into practice without causing substantial instability or uncertainty and possible emergence of macro-economic problems which are worse than what they are trying to solve.