New Delhi, July 13 -- Last month, the Reserve Bank of India's (RBI) Financial Stability Report arrived amid a turbulent macroeconomic environment. Oil prices had spiked due to West Asia tensions, the rupee had slipped amid foreign fund withdrawals and RBI's own inflation forecast had been revised upward.

By the textbook, the central bank should have raised interest rates. Instead, its Monetary Policy Committee held the repo rate steady at 5.25% for the second-straight review, and India's long bond yields have stayed remarkably placid through it all.

Part of the explanation is deliberate engineering. RBI has opened a swap window for foreign currency non-resident bank deposits and eased the rate ceiling on these, hoping to attract $50 bil...