Consequently we have to be concerned with exchange rate instability, as distinguished from mere fluctuation, for its potential to affect other markets, both goods and capital markets. Exchange rate instability arising from external events can give rise to domestic instability in the operation of the stock market, government securities markets, and the money markets, along with their attendant effects.
For emerging economies such as India, it therefore becomes necessary to institute special defenses for ensuring financial stability. Furthermore, with the interest rate emerging as a key channel of monetary policy signals, the efficacy of monetary transmission is predicated on the health of the financial sector. The gradual liberalization of the financial sector has also witnessed the emergence of conglomerates, with attendant systemic implications.