Moreover, it is movements in the exchange rate that permit domestic interest rates to diverge from their foreign counterparts for a period of time. For example, an increase in official interest rates by the central bank, in response to demand and inflation pressures in the economy, leads to a stronger currency, which also works to restrain those pressures.
In particular, exports witnessed robust growth despite not so favourable an external environment. Growing export of services and remittances have helped maintain a marginal surplus in the current account in spite of a growing trade deficit. Reflecting the improved fundamentals, capital inflows have been buoyant, but manageable for the conduct of monetary policy. The health of the financial sector has also been improving.