Capital inflows can provide a buffer but prudence requires us to keep our current account deficit and local inflation in check
The Indian exchange rate regime underwent a big change in the early 1990s. From the Reserve Bank of India (RBI) determining the exchange rate everyday, we first moved to a dual exchange rate regime and a year later in 1993 adopted a market-determined exchange rate regime. It was made clear that RBI would intervene when it felt necessary. The opening up of the external sector, which included a liberal trade policy, a market-determined exchange rate and expanded sources of external capital flows greatly strengthened the external sector.