Consequently, often the impossible trinity of fixed or managed exchange rates, open capital accounts and discretion in monetary policy has to be managed in what could be termed as “fuzzy” manner rather than  4  BIS Review 97/2007  satisfactorily resolved – a problem that gets exacerbated due to huge uncertainties in global financial markets and possible consequences in the real sector.
Second, in the emerging scenario of large and uncertain capital flows, the choice of the instruments for sterilization and other policy responses have been constrained by a number of factors such as the openness of the economy, the depth of the domestic bond market, the health of the financial sector, the health of the public finances, the country’s inflationary track record and the perception about the credibility and consistency in macroeconomic policies pursued by the country.