RBI could consider issuing bonds to absorb foreign money into stocks

The Reserve Bank of India may consider issuing its own bonds to help absorb a deluge of foreign currency in stocks that threaten financial stability, according to a report released by its researchers.

Current laws prohibit the RBI from selling its own paper, and budget constraints could prevent the government from issuing so-called market stabilization bonds, or MSSs, that authorities have used in the past. This made it more difficult for the RBI to navigate what is known as the Impossible Trinity – that is, maintaining an independent monetary policy while allowing the free flow of capital and ensuring a stable currency. .

“The sterilized intervention is an effective solution to managing the trilemma in India,” the central bank said in its annual currency and finance report, released on Friday. “Strengthening sterilization capacity may be necessary to cope with possible surges in capital flows in the future.”

The RBI report recommended further strengthening foreign exchange reserves, citing fluctuations in the rupee during the era of the global taper tantrum in 2013. India’s stock is already close to $ 600 billion and exceeds most of the world. standard metric requirements.

The rupee extended losses after the report. Indian stocks fell on Friday, as did Asian markets, fearing that a faster global economic recovery could lead to waning monetary policy support and inflows. Michael Patra, deputy governor of the RBI whose monetary policy department contributed to the report, in recent days attributed the rise in stocks to possible “irrational exuberance”.

“The precautionary requirements to create adequate buffers against the global fallout are a public policy objective, and are not confined to the sole area of ​​monetary policy,” the report said.

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