function of the anticipated persistence of capital inflows. the design of policy depends upon the expectation of whether the inflow of capital is temporary or is expected to continue. a temporary increase in inflow, perceived as such by the public, which may lead to a temporary real appreciation of the exchange rate, is unlikely to have major effects. problems, however, arise if the inflow is temporary, but the public expects the inflow to continue. but, in real life, nobody knows with confidence, what is temporary, how temporary it is, and what the public perception is, and indeed how temporary the public perception is! so, let me straightaway go into the instruments. internationally, a number of instruments have been used to sterilise capital inflows, the chief among them being the sale of government bonds through open market operations. this policy is useful temporarily and if used for long, leads to renewed inflows. we in the reserve bank are, however, well equipped with physical stock of government securities. we have been active in the repo market in recent months to manage temporary liquidity conditions. the idea is to realise a fine balance in order to achieve the objectives of sterilisation without putting pressure on yields. discount policy, which implies restricting the access of banks to central bank credit or raising the cost of refinance, has also been used by countries to sterilise capital inflows. this instrument cannot, however, be used in the current context when there is plenty of liquidity in the money market and there is no borrowing from the central bank. however, this instrument may go against the long - term objectives of monetary and credit policy. varying the reserve requirements is yet another policy tool. mobilising government deposits has served as a variation to absorption of reserves in some countries. variable deposit requirements in the nature of interest - free deposits with the central bank is another form of discouraging capital inflows. this measure, while it reduces the need for costly sterilisation through the sale of bonds, may result in misallocation of resources and reduce the facility to borrowers to take advantage of lower international interest rates. we have used the crr successfully in the past to stem inflows. after the imposition of crr on incremental nri deposits there has been some deceleration in the growth of foreign currency deposits during the current financial year. entering into foreign currency swaps ( spot sell - forward buy ) is

y v reddy : central bank communications : some random thoughts keynote address delivered by dr y v reddy, governor of the reserve bank of india, at the regional seminar on central bank communications sponsored by the international monetary fund, mumbai, 23 january 2006. * * * ms. wanda tseng, mr. ariyoshi, distinguished fellow central bankers and friends, at the outset, i would like to extend a hearty welcome to all our guests to india. i hope you will find the weather outside as well as the intellectual stimulation in the seminar pleasant and productive. i am thankful to the organisers for inviting me to participate in the seminar. the subject is close to our head and heart and we, in the rbi, had organized a saarcfin sponsored seminar last year on this subject, and we learnt a lot from each others ’ experience in south asia. today ’ s seminar is different, and may perhaps prove to be specially rewarding for several reasons : it covers a wider range of central banks, and has the benefit of participation by multi - lateral institution as well as the media representation, in addition to a private sector bank. the organisers need to be complimented on an excellent structuring of the seminar in terms of issues, classification and participation. i find the key questions for consideration listed in the programme very pertinent, and so, perhaps it is ideal for the keynote address to outline some random thoughts on the questions, based on our experience in the reserve bank of india ( rbi ). in the past, central banking was shrouded in secrecy with some ‘ mystique ’ surrounding it. in the recent years, however, there has been greater visibility, transparency and communication. what are the reasons? first, increased independence of central banks warranting publicly accountable conduct ; second, adoption of inflation - targeting – whether through a legal sanction or otherwise ; third, a mandate to the central banks, either explicit or implicit, for maintaining financial stability in a world where the financial markets and their expectation matter. it is interesting to note that even in the uk, where there is a financial services authority, it is the bank of england which publishes the financial stability report, periodically. what are the theoretical perspectives in this regard? the academic and policy literature recognises the role of communication for the effectiveness of monetary policy, and has broadly focused on four aspects of policy, namely, efficiency, time - consistency, optimality of communications, and institutionalcum - decision making processes. efficiency issues