Definition
RBI Intervention
RBI intervention is the central bank's buying or selling of foreign currency in the spot, forward or futures markets to manage rupee volatility and liquidity.
When the rupee falls sharply, the RBI sells dollars from its reserves to support it; when inflows are strong, it buys dollars to prevent excessive appreciation and to rebuild reserves. The aim is to smooth disorderly moves, not to defend a fixed level.
The RBI intervenes both in the spot market and through forwards and the offshore NDF market via authorised banks. Sterilised intervention, paired with open-market operations, lets the RBI manage the rupee without letting the rupee liquidity it injects or absorbs disrupt domestic interest rates.
Related terms
- Forex ReservesForex reserves are the foreign-currency assets and gold the RBI holds to manage the rupee, pay for imports and meet external obligations during stress.
- Non-Deliverable Forward (NDF)An NDF is a cash-settled offshore currency forward where no actual exchange of the underlying currency occurs, used to trade or hedge restricted currencies like the rupee.
- Managed FloatA managed float, or dirty float, is a regime where the exchange rate is largely market-determined but the central bank intervenes to curb excessive volatility.
- SterilisationSterilisation is a central bank offsetting the domestic liquidity impact of forex intervention by conducting open-market operations so money supply and interest rates stay on target.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.