RBI's currency strategy flooding the market with more foreign funds

The Reserve Bank of India’s strategy to shift some of its currency intervention to the forwards market is adding to its problems.
 

Its balancing act to keep the rupee stable amid heavy foreign inflows while also keeping excess liquidity in check is flooding the market with more foreign funds, prompting a vicious cycle of interventions.

The RBI’s outstanding forwards book grew to $28.3 billion as of November from a negative $4.9 billion in the fiscal year 2019-20, highlighting the extent of its operations. That’s pushed the 12-month implied yields, which typically reflect the interest rate differential between India and US,