A critical issue in this regard is a view on whether the capital flows are temporary or permanent in nature. The recent episode of large capital flows prompted a debate in India on the need for exchange rate adjustment.
In a scenario of uncertainty facing the monetary authorities in determining temporary or permanent nature of inflows, it is prudent to presume that such flows are temporary till they are firmly established to be of permanent nature. 4  BIS Review 9/2005  The liquidity impact of large inflows was managed till the year 2003-04, largely through the day-to-day LAF and OMO.