In this episode of How India’s Economy Works, Puja Mehra speaks with Ananth Narayan, Economist and Former Whole Time Member, SEBI about the growing interconnections between India’s interest-rate, equity and currency markets—and the unintended consequences of intervening in each of them separately.
Narayan argues that the RBI’s aggressive intervention in the bond market, including record purchases of government bonds, has kept interest rates artificially low and weakened the appeal of fixed-income assets for domestic savers. This, he says, has pushed more savings into equities and overseas assets, contributed to stretched equity valuations, and made it harder for foreign capital to flow into India. At the same time, lower interest-rate differentials have created incentives for hedgers and speculators to buy dollars, adding pressure on the rupee.
The conversation explores the idea of an “impossible trinity” in a more interconnected financial system, why RBI intervention in one market can create problems in another, and whether India needs to allow markets to function more freely. Narayan also discusses tax reforms for fixed income, greater freedom for Indians to invest overseas, and why policymakers need to take a holistic view of financial markets.
Tune in for insights on RBI intervention, interest rates, the rupee, capital flows, equity valuations and what India needs for more sustainable capital formation.
CHAPTERS
(00:00) Introduction to the Impossible Trilemma
(01:19) Interconnected Markets and Bond Interventions
(04:57) Low Rates Distort Credit Markets
(12:15) Discretionary Savings Flood Equity Markets
(15:47) Domestic Overvaluation Deters Foreign Capital
(24:49) Interest Differentials Drive Dollar Outflows
(28:51) Subsidized Swaps and Forex Interventions
(31:54) Reforming Fixed Income Tax Parity
(36:18) Allowing Freer Overseas Investment Limits
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