Definition
Sterilisation
Sterilisation 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.
When the RBI buys dollars to slow rupee appreciation, it injects rupees into the banking system, which could fuel inflation. To sterilise this, the RBI sells government bonds or uses other tools to soak up the extra rupees.
Sterilised intervention lets the RBI influence the exchange rate without losing control of domestic monetary conditions, addressing one leg of the impossible trinity. Tools have included the Market Stabilisation Scheme (MSS) bonds and open-market operations.
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.
- Trilemma (Impossible Trinity)The impossible trinity states that a country cannot simultaneously have a fixed exchange rate, free capital movement and an independent monetary policy; it can pick only two.
- RBI InterventionRBI 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.
- Open Market Operations (OMO)Open Market Operations are the RBI's purchases and sales of government securities in the market to manage liquidity and influence interest rates.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.