The elasticity of reserves beyond the recommended level can be continued for a longer time than recommended, and withdrawal of liquidity support by the Reserve Bank of India, if necessary, can be done in a calibrated way to avoid an abrupt response.

In the process of quantitative easing, the balance sheet of the Fed increased considerably. What would be the way out for RBI if the government went for such an experiment?

Exposure of RBI to US treasury bills, FOB of gold, FOB of cash, and US sovereign debt are different from the exposure of the Fed. All these foreign currencies are lent out by the RBI to financial institutions on a short-term basis and repaid in the US dollar. This policy was initiated to control the inflow of foreign exchange in the market. Now the RBI has its own system of lending out the foreign exchange to meet demand. The foreign exchange market is both a supply and a demanding market. In an unbalanced demand-supply scenario, the demand for foreign exchange in the market exceeds the supply and a shortfall is experienced. Then in a disequilibrium situation, excess demand in the market also surpasses the excess supply and a shortage is experienced. That is the nature of the market. This situation is neutralized when the RBI intervenes with long-term maturity US treasury bills or FOB and with gold purchases. And if that fails, there is a so-called "buyers' strike" when people go in and ask for the US dollar or gold at a cheaper rate. On one hand, there is a "buyers' strike" to absorb the excess demand, while on the other hand, long-term US treasury bills are put into the market and the RBI may engage in open market operations to absorb excess liquidity. Therefore, the balance of liquidity is maintained on both sides. It is assumed in most policy scenarios that the excess demand or supply of foreign exchange in the market will be absorbed by foreign exchange inflows from foreign portfolio investments (FPI) or foreign central bank interventions or by open market operations.

How do you think RBI should deal with the current surge in Indian equities?

The situation of the Indian equity market has improved over the past few years and now is on an upward trajectory, showing a clear trend. However, the trend is not good if one looks at the long-term chart of the Indian stock market. In the previous two years, the trend was upward, which was consistent with government policies. If you check the long-term trend of the Indian market, this is not a good time to accumulate a large exposure to the Indian stock market, because the trend in the equity market would be upward in the long run.

All these equity market events or moves would take time. So, it is not a good time to make an investment.

As regards an excellent time to make an investment in the Indian equity market, we have to look at the short-term trend, which is positive. The trade war issues are not a major risk. The short-term indicators are looking positive, suggesting that the upward movement of the Indian equity market is likely to continue.

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