Handling the dollar deluge

Diverging fiscal responses to the crisis can create serious macroeconomic challenges for countries globally

The Reserve Bank of India’s (RBI’s) balance sheet size has grown sharply to 27 per cent of gross domestic product (GDP) in early July, a level last seen in 2006-08, from just 22 per cent at the end of February. In absolute terms it has expanded by  Ra 8.3 trillion, a growth of 18 per cent in just four months. Developed economy central bank balance sheets have also grown during this period, but that has been to fund government borrowing. The RBI’s balance sheet growth, on the other hand, is involuntary, its hand forced by the “impossible trinity”. That is,