How India’s central bank subsidised the diaspora - The Economist

India’s central bank has long courted its overseas citizens, but a recent analysis suggests that this courtship comes at a measurable cost. By offering attractive interest rates on non-resident Indian (NRI) deposits or intervening in currency markets to keep the rupee stable, the Reserve Bank of India effectively subsidises the diaspora’s savings. While this bolsters foreign-exchange reserves and smooths capital flows, the subsidy means the central bank is paying a premium for funds that might otherwise flow elsewhere.

The market relevance lies in the trade-off embedded in this policy. A stable rupee supports importers and reduces volatility, but it can also make exports less competitive and strain the central bank’s balance sheet. For investors, the key is to watch how long this arrangement persists. Any shift—such as tightening global rates or a change in India’s current-account position—could force a recalibration of these implicit subsidies, with knock-on effects on the rupee and NRI deposit flows. Understanding this mechanism helps observers read India’s external financing puzzle, rather than simply reacting to headline numbers.