The Impossible Trinity, Revisited.
A sharp opinion piece by Ananth Narayan (former wholetime member, Sebi) argues that RBI's large, sustained market interventions call for greater coherence in its overall policy framework — even though the central bank maintains it does not target any specific USD/INR level.
Key Highlights:
• Over the last 10 years, across spot and forward markets, RBI's net annual currency intervention has averaged about $60 billion, or 2% of GDP — with the RBI selling a significant $118 billion in FY25 to restrict the rise in USD/INR from 83.50 to 85.50
• Between April 2025 and February 2026, RBI sold another $37 billion even as USD/INR moved up to 91; following the outbreak of the Iran war, it sold a further $37 billion in March 2026, with USD/INR eventually ending the month around 93.50
• The author argues India's interest-rate policy extends beyond the MPC — RBI also intervenes heavily in bond markets and modulates banking liquidity to facilitate monetary-policy transmission, with its own bond holdings rising by ₹7.2 trillion during FY26, accounting for a substantial 40% of incremental government debt
• RBI's large bond purchases and liquidity operations have kept rupee-denominated interest rates below levels that would otherwise be required to attract discretionary savings — the benchmark 10-year India-US spread averaged just 235 basis points in FY26, a multi-year low
• The piece contends this has pushed discretionary savings away from debt and into domestic equities, contributing to pockets of overvaluation, while low interest-rate differentials also compressed forward premia — making it cheaper to hedge and speculate against the rupee, deterring foreign investment and incentivising outflows
• For now, RBI has eased the underlying "trilemma" by attracting three-to-five-year foreign funds through its heavily subsidised FX-swap window — but this doesn't eliminate the structural tension, since funds raised through the swap window keep domestic interest rates below what would otherwise be needed
• The author's proposed solution: rather than mechanical rules, RBI could adopt a broader framework — similar to inflation-targeting central banks like the ECB, RBA, BoE and BoJ — that explicitly considers the impact of large interventions on interest-rate differentials, capital flows, and exchange rates, alongside addressing structural issues like taxation of fixed-income returns and capital gains to attract more discretionary savings into deposits and debt markets.
A compelling case for RBI to formalise how it thinks about the interconnectedness of interest rates, capital flows, and exchange rates — not by targeting the rupee, but by being more transparent about the trade-offs its interventions already create.
