The Reserve Bank of India (RBI) is struggling to deal with the impact of an unprecedented surge of foreign capital into the Indian economy. Its policy of controlling interest rates and simultaneously intervening to hold the exchange rate stable at Rs 39-40/US$ is simply exacerbating these flows, since investors are able to make relatively safe bets on the rupee’s rise and profit from the interest rate differential.
Although the RBI is generally committed to gradually opening India’s...
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