The Swan diagram may prove handy in analysing various combinations of internal and external imbalances in the economy
Indian policymakers have faced a tricky situation over the past few months in maintaining support to the economy while being careful not to fan inflation further. The result has been a gradual exit from the stimulus put in place after the pandemic hit in early 2020. The one area of comfort through all this was India’s balance of payments. International capital flows were more than what we needed to cover the current account gap. The Reserve Bank of India (RBI) could absorb these excess dollars into its burgeoning foreign exchange kitty, especially as domestic investment by the private sector was weak.