to september 1997, excess supply conditions prevailed in the market and the reserve bank undertook large net purchases of foreign currency. from september 1997 to mid - january 1998, acute exchange market pressure was staved off through sales of foreign currency, coupled with administrative measures such as restricting certain forward contracts and monetary policy measures. mid - january to april 1998 marked the return of stability and enabled the rolling - back of tight monetary measures introduced in january 1998. when the foreign exchange market was characterised by considerable uncertainties in may to june 1998, several measures were announced by the rbi in june 1998 to reverse the demand / supply mismatches in the market. the market responded positively to these measures, but in august 1998 there were fluctuations in the exchange rate in view of international developments. the rbi again undertook strong administrative and monetary measures, which included an increase in the repo rate and the cash reserve requirement of banks. a vigilant and proactive policy by the rbi was, therefore, essential to avoid crisis in a highly unsettled atmosphere in international currency markets. managing extraordinary events an extraordinary situation arose consequent upon the imposition of sanctions, and the issue of resurgent india bonds ( ribs ) is an interesting example of management of the capital account in such a situation. the ribs were designed to compensate for the extraordinary events in 1998 - 99, which may result in some shortfall in the normally expected level of capital inflows though the current account deficit would continue to be well within 2 per cent of gdp. due to the sudden developments in 1998 - 99, a temporary disruption in capital flows, especially debt flows, was anticipated. instead of dipping into currency reserves, which might affect sentiment adversely, or cutting the current account deficit through drastic import cuts, which would affect real economic activity, the alternative was to enhance debt flows at the least possible cost. there was a need to offset the adverse negative market sentiment created in the international capital markets due to the downgrading of india ’ s sovereign rating to non - investment grade. this could be done by demonstrably raising debt resources at a cost lower than that any organised financial intermediary was prepared to provide in the context of the rating downgrade. raising resources through sovereign borrowing was considered to be time - consuming and in any case inadvisable as a maiden offering under adverse circumstances. at the same time, it was necessary to ensure that amounts so obtained were restricted quantitatively to meet essential needs as a replacement for normal debt flows

current and capital accounts. it must be noted that we insist as a general rule that foreign currency transactions take place for financing defined underlying transactions. no doubt, genuine hedging of exposures under specified conditions is allowed. transactions merely involving currency exchange or with purely speculative motives are viewed with serious disfavour. this consistent approach has lent credibility to the management of both current and capital transactions. as explained by governor jalan, the objective of the current policy in regard to the foreign exchange market is to maintain orderly conditions in the financial markets. the policy is aimed at preventing any destabilizing speculation in the market while at the same time facilitating foreign exchange transactions at market rates for all permissible purposes. crisis avoidance it would not be appropriate to conclude that managing capital flows on the above lines, however efficient, will ensure that there would be total tranquility in the capital flows. in fact, even with a managed capital account, we had to contend with occasional surges in capital flows between 1993 and 1997. in general, the short - term response has taken a number of forms, viz. raising of reserve requirements, reviewing the pace of removal of restrictions on capital inflows, relaxation of end - use specifications, liberalization of capital outflows, partial sterilization through open market operations, and deepening the foreign exchange market by routing an increased volume of transactions through the market. the prolonged stability in the exchange rate of the rupee from march 1993 came under stress in the second half of 1995 - 96. in response to the upheavals, the rbi intervened in the market to signal that the fundamentals were in place and to ensure that market correction of the exchange rate was orderly and calibrated. exchange market intervention was supported by monetary policy action to withdraw liquidity. the pressures intensified towards the end of january 1996 and the first week of february 1996. the reserve bank undertook a number of measures to encourage the faster realization of export proceeds and to prevent an acceleration of import payments. the interest rate surcharge on import finance was raised, the scheme of post - shipment export credit denominated in foreign currency was scrapped and the rbi continued to intervene actively in the spot, forward and swap markets. the year 1997 - 98 and the first quarter of 1998 - 99 posed severe challenges in exchange rate management in the face of the threat of external contagion and other uncertainties. distinct phases of exchange rate movements and response by the rbi can be identified. during april