The Reserve Bank seeks to protect us by staying silent.

To the disappointment of banks and markets, the Reserve Bank imposed restrictions on new issues of Masala bonds in June. Masala bonds raise money from foreign investors in rupees, which takes away the risk of a fall in the value of the rupee at the time of redemption. In 2012-13 Suzlon and Wockhardt defaulted on their dollar loans and faced enormous pressures from foreign creditors. Masala bonds seek to reduce the risks faced by those companies. The RBI put a ceiling to the rate of interest at which the bonds maybe sold and also increased the period of maturity for issues of over $50 million. "The central bank is clipping the wings when the market was just starting to take off," said a disappointed trader. "It is a retrograde step for sure, it will kill the Masala market further," said a banker. Not just the RBI, the Securities and Exchange Board of India, or Sebi, ordered a temporary stop to any new issues of Masala bonds, wrote R Singhal. The RBI became concerned because "certain Indian companies raised foreign currency loans in overseas markets and then on-lent the proceeds to domestic entities as rupee bonds." The RBI is battling "a tsunami of portfolio flows", which means foreign investment into Indian stocks and bonds. "FPI investments in equity and debt markets saw combined net inflows of Rs 171,581 crore til July end. This is six times more than the Rs 27,055 crore invested by FPIs during the same period of 2016." With so much money flooding into India the Real Effective Exchange Rate for the rupee is 18% overvalued. This, despite the RBI buying over $100 billion from the market so that our foreign currency reserves climbed to $386 billion in July. Buying dollars releases rupees into the system which is already flush with liquidity, following demonetisation in November last year, and slowing of growth. A strong rupee reduces prices of imports, especially oil, and keeps a lid on inflation, which then increases pressure on the RBI to lower policy rate, which was lowered by 25 basis points to 6%. Some think that the RBI should allow the rupee to rise so that imports are affordable. Already India's trade deficit with China is over $50 billion, so a stronger rupee is only going to increase that. India needs to create millions of new jobs and for that it needs to increase exports, as the East Asian economies did. A survey by the RBI in June showed that people expect lower employment growth and lower income growth and manufacturers also predict a lower employment growth. Then there is a danger of flight of currency if something unexpected happens, like a war with North Korea. No wonder the RBI prefers to keep silent on external risks.