Most people have quite naturally been keeping a close tab on how demonetisation impacted economic activity in the third quarter of this fiscal year. The result is that another significant event has been more or less ignored.
Hidden in the latest quarterly balance of payments data released by the Reserve Bank of India last week is the revelation that non-resident Indians pulled out $25.98 billion from the banking system in the three months ended December while they put in only $7.45 billion of fresh deposits. This capital outflow had been anticipated as the three-year dollar deposits collected to defend the rupee during the foreign exchange shock of 2013 matured.
Yet, the Indian central bank—over the tenure of two governors—deserves credit for the way it managed such a large outflow of foreign exchange without unsettling the rupee. Forward contracts that were bought in preparation undoubtedly helped. India is now comfortably placed in terms of its balance of payments. The way the rupee crisis of 2013 was managed is an important public policy achievement.