RBI Interventions is a concept and a set of actions by the Reserve Bank of India (RBI), the country's central bank, to manage the exchange rate of the Indian Rupee (INR) and maintain orderly market conditions. The origin of this intervention strategy is linked to India's shift to a market-determined exchange rate system in March 1993, which replaced the earlier fixed-rate regime. The problem it solved was curbing excessive volatility in the foreign exchange market, as the rupee's value became largely determined by market forces of demand and supply.
India follows a managed float exchange rate regime, meaning the RBI intervenes only to smooth out sharp fluctuations, not to fix the exchange rate at a specific level. The mechanism involves the RBI buying or selling foreign currency, primarily the US Dollar (USD), in the foreign exchange market. Key methods include Spot Market Intervention, where the RBI directly sells dollars from its reserves to curb rupee depreciation, and Forward Market Intervention and Dollar-Rupee Swaps (like buy/sell swaps) to influence currency movements and manage domestic liquidity without immediately affecting spot reserves.
A critical related concept is Sterilised Intervention, where the RBI offsets the liquidity impact of its forex operations. For instance, when the RBI sells dollars (which drains rupee liquidity), it simultaneously conducts Open Market Operations (OMOs), purchasing government bonds to pump rupees back into the system. Conversely, to absorb surplus rupees from capital inflows, the RBI issues securities under the Market Stabilisation Scheme (MSS). The legal framework for foreign exchange transactions connects to the Foreign Exchange Management Act (FEMA), 1999, which came into force on June 1, 2000.
Recently, the RBI has increased its use of non-spot tools like Forex Swap Auctions and has also intervened in the offshore Non-Deliverable Forwards (NDF) market to manage expectations and volatility. Furthermore, the RBI has implemented measures like capping banks' Net Open Position (NOP) in foreign currencies to curb speculative exposure, demonstrating a more proactive and multi-pronged strategy. The core objective of curbing excessive volatility has stayed the same since 1993.