India’s forex reserves set a new record. At $140 Billion, the reserves are now the 6th largest in the world. The record is due mostly to foreign capital inflows, which also continue to set records. Foreigners are pouring money into Indian stocks and bonds, in search of the typically high returns that emerging markets offer. Not only have share prices reached new highs, but so has the value of the Indian Rupee.

India derives much of its economic growth from growth in the export sector. Thus, the Reserve Bank of India has been working overtime to ‘sterilize’ the exchange rate, and prevents India’s exports from becoming too expensive. This sterilization typically assumes the form of buying bonds from the public, which increases India’s money supply. However, this increase in the money supply can spur inflation, and India cannot afford this. Nonetheless, India will likely continue to sterilize for as long as it can, taking cues on exchange rate manipulation from its neighbor to the North. Reuters reports:

They say signs China is still reluctant to allow its tightly pegged currency to strengthen had hardened the resolve of countries like India to keep their currencies under check.

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