The bulk of the inflows have been sterilised through open market operations (OMO) including the Liquidity Adjustment Facility (LAF). This is reflected in contraction of net RBI credit to the government by Rs. 88,698 crore (up to March 26, 2004), substantially offsetting the pressures on monetary expansion emanating from external sector.
the financial sector is sound, output gaps are not already large, and foreign exchange reserves are large — to avoid devaluing during a financially volatile period, it probably should endeavor to do so through some combination of monetary tightening, structural reform, and foreign exchange rate intervention.