Definition
Sterilised vs Unsterilised Intervention
Sterilised intervention offsets the money-supply impact of forex operations through open-market actions, while unsterilised intervention lets reserves changes alter domestic liquidity.
When the RBI buys dollars and does nothing to mop up the rupees it releases, the intervention is unsterilised and expands money supply, risking inflation. When it sells bonds to absorb those rupees, the intervention is sterilised, leaving liquidity and rates unchanged.
The RBI typically sterilises to manage the rupee without losing control of domestic monetary conditions, the practical way it navigates the impossible trinity. The cost of sterilisation (interest on bonds sold) is a constraint on how much it can do.
Related terms
- 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.
- 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.
- 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.