A consequence of too little spreads.

India's "Exports rose by 13.78% to USD 43.56 billion in April, the highest monthly outbound shipments in more than four years, driven by petroleum products amid a surge in crude oil prices, but the trade deficit widened to a three-month high of USD 28.38 billion due to an uptick in imports." ET. Which means a current account deficit (CAD) instead of a surplus. "Foreign investors (FPIs) continued to pare their exposure in Indian equities, withdrawing Rs 329.63 billion in May." "In 2026 so far, the total outflow by FPIs from the equity market has reached just under Rs 2.3 trillion, which is higher than the nearly Rs 1.7 trillion pulled out during the entire 2025." TOI. "The aggregate net investments by FPIs in local shares stood at Rs 7.3 trillion as on June 1," so that the value of India's stock market has fallen behind Taiwan and South Korea. ET. FPIs have been selling Indian government bonds as well. FPIs are "net sellers of $836 million in the general debt route and $490 million in the voluntary retention route," but "net buyers of $$48 million in the passive fully accessible route." The reason for the selloff of Indian bonds is that "India's benchmark 10-year government bond yields 7.004%, compared  with 4.435% on the US 10-year Treasury leaving a spread of about 256 basis points (bps)" Historically, it has been above 300 points, Mint. The fall in the rupee against the dollar has added to the FPI decision to sell. The reason is that the Reserve Bank of India (RBI) has chosen to reduce the difference between its interest rate and that of the US. The US Federal Reserve cut its Funds rate down to 0% to 0.25% on 1 March 2020 (Forbes), while the RBI cut its interest rate to 4% on 23 May 2020 (The Hindu) which gave a spread of 400 bps. The US Fed started raising rates on 17 March 2022, reaching a height of 5.25% to 5.50%, while the RBI started hiking its interest rate on 5 May 2022 (TOI), to its highest level of 6.5% in February 2023 (Bajaj). Which means that the difference with the US fell from 400 bps to just 100 bps. The Fed started reducing its Funds rate in September 2024 and has stopped at 3.50% to 3.75% in December 2025, while the RBI cut its interest rate by a cumulative 125 bps to 5.25% (BT). The difference with the US is 125 basis points. Foreign investors are clearly not impressed. "India is trying to defend the rupee and the stock market simultaneously - an expensive ambition for a country running persistent current account and lately, balance-of-payments deficits, especially when much of it forex reserves are rented capital," wrote Shankar Sharma. While China earns surpluses, "Our dollars largely come from: FPIs, foreign direct investment (FDI), Borrowings and overseas remittances." Domestic investors are supporting the stock market and helping FPIs exit at higher prices. Share prices should be allowed to fall, says Sharma. "Countries survive stock market crashes. But countries routinely go bankrupt because of currency crashes." The RBI is also helping FPIs  by constantly selling dollars to support the rupee. A stronger rupee buys more dollars for FPIs. Yesterday, "The rupee ended at 95.2650 per dollar." "Traders said that the losses would have been steeper had it not been for the RBI's dollar-selling interventions, which have continued in almost every session since the rupee hit a record low of 96.96 per dollar in mid-May." Reuters. According to Bloomberg Economics, the RBI may have sold $12 billion worth of gold to buy foreign exchange. ET. The RBI is effectively transferring our gold and forex reserves to foreign investors. In doing so, by some magic of math, the RBI made so much profit that it transferred Rs 2.87 trillion to the Central government. TIE. If the RBI makes profits from transferring dollars to foreigners, it should transfer some dollars to Indian citizens as well. Indians will become wealthier, the RBI will augment its profits and the government will get higher transfers to cover its fiscal deficit. A win-win-win, if ever there was one. Magic.