India’s forex reserves are growing at nearly $20 Billion every month and are quickly
approaching $300 Billion.  Of course, accompanying this windfall are the inevitable questions about what to do with the money.  The Royal Bank of India (RBI) had determined that at most, the Indian economy can absorb $50 Billion a year.  Accordingly, the bulk of the capital inflows are “sterilized” through the issuance of forex stabilization bonds, which are aimed both at controlling inflation and limiting the appreciation of the Indian Rupee.  Unfortunately, due to already-high inflation in India, the RBI must pay a higher rate of interest on the stabilization bonds than it is earning on the underlying assets, which means the scheme is a losing proposition.  The Economic Times reports:

The RBI is also hesitating to allow further appreciation in exchange rate. While it can allow appreciation of the exchange rate to avoid injecting liquidity (by way of buying dollars and selling rupees), it is concerned about the fact that it is already over-valued.

Read More: The 250-bn dollar question of capital inflows