wake of recent developments. time does not permit me to go into it here, but it is important to point out that the different policy responses we saw across emes to the volatility in capital inflows were largely the outcome of their exchange rate policy framework. countries that orient their exchange rate regimes to export competitiveness typically have current account surpluses. this is a characteristic of the asian emes and, in this sense, india is a significant exception to the asian rule. these surpluses are reflected in a build - up of foreign exchange reserves, which may be further enhanced by large inflows of capital and the further accumulation of reserves to prevent currency appreciation, which undermines competitiveness in the short run. in the current global context, when capital inflows stop, reserves built up from current account surpluses provide the capacity to manage exchange rates in the face of external pressure. india has large reserves, of course, over $ 300 billion, but because we have a current account deficit, the reserves are essentially counterbalanced against our external liability position. in an extreme scenario, if there is a large outflow of capital, the adequacy of reserves will be judged by the economy ’ s ability to finance the current account deficit and, over and above that, meet short - term claims without any disruption or loss of confidence. in light of this, the value and use of reserves in the indian context must be viewed somewhat differently than in the context of a structurally current account surplus economy. reserves essentially provide comfort to external counterparties that we have the capacity to meet our obligations. while the recent sharp depreciation has in certain quarters led to an assessment of “ helplessness ” in dealing with the kind of global turbulence we are seeing today, our strategic behavior should not be misconstrued as an inability to lean against the wind. consider the following alternatives. not using reserves to prevent currency depreciation poses the risk that the exchange rate will spiral out of control, reinforced by self - fulfilling expectations. on the other hand, using them up in large quantities to prevent depreciation may result in a deterioration of confidence in the economy ’ s ability to meet even its short - term external obligations. since both outcomes are undesirable, the appropriate policy response is to find a balance that avoids either. that balance can be found in precisely the structural capital controls that i referred to earlier. resisting currency depreciation is best done by increasing the supply of foreign

will remain a persistent source of inflationary pressure unless there are significant improvements in productivity, both at the cultivation stage and in the distribution process. many forces need to be brought into play quickly to achieve this – infrastructure, technology and extension services, reform of market institutions and re - alignment of price incentives and financial services that can support them. however, to come back to the growth and inflation view over the next year, in a scenario in which global turbulence reduces, we should see inflation moderating, which would then help the growth cycle reverse. even in this scenario, reforms that improve the investment climate are critical. if global uncertainty persists, making us even more dependent on domestic drivers to sustain growth, these reforms become absolutely essential. concluding remarks let me conclude by summarizing the main points that i wanted to make in this address. first, in dealing with global turbulence and its short - term impact on india, we need to balance between the risk of a rupee spiral and that of a loss of confidence. our capital account management framework gives us the capacity to do this and we will continue to use that capacity as appropriate. we have to recognize that volatility may be with us for a while and we have to deal with it. however, if the risk of a spiral escalates, reflected in sharp movements in the exchange rate, we will take swift action as and when necessary. second, domestic liquidity may be showing signs of stress. here again, we have the instruments and the willingness to use them, in the context of our distinction between liquidity management and monetary policy. third, while there are many challenges to managing the growth - inflation dynamics, both external and domestic, they are manageable. moderating growth will help ease inflationary pressures, which in turn will help growth stabilize. of course, accelerating growth over the longer term without provoking inflation requires many structural changes, on which the policy establishment must put the highest priority. let me end by thanking the organizers once again for inviting me to speak at this event and for accommodating my scheduling constraints through the use of this video recording. i trust that my remarks have served as a useful input to your discussions. my best wishes for a productive day. bis central bankers ’ speeches bis central bankers ’ speeches