.......There are several complications to this argument, and Reserve Bank of India Governor D Subbarao has made his questions about it apparent in recent communications. RBI has been doubtful about doing anything more with the exchange rate than managing its volatility. There is certainly disagreement on whether it is more effective to stimulate growth through exports or through rate cuts. More importantly, the point is whether a real depreciation in the currency should be used to allow nominal depreciation or to build up foreign exchange reserves. If New Delhi intends to finance the current account deficit through FII funds, then the size of India’s reserves becomes vitally important............
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