1.

Huge accumulation of foreign resources taking place in India due to sustained

capital account and current surplus. This reduces risk of huge capital outflows
and currency depreciation
2. However, huge forex reserves have macroeconomic effects e.g. increase in
monetary base (H). As domestic Ms = money multiplier * H, thus if H
increases, domestic Ms increases.
3. Together with fall in SLR & CRR and bank rate, this causes increase in liquidity
in the system. RBI can sterilize part of this liquidity increase through open
market operations.
4. Kohli(2001) has identified 2 sources of capital flow: External(due to interest
rate fall in foreign countries) & Internal(due to reform policies).