Most bond investors watch the RBI’s repo rate decisions closely. Far fewer pay attention to something just as consequential\u2014the RBI’s interventions in the foreign exchange market. In this article, we explain what forex interventions are, how they automatically alter rupee liquidity in the banking system, why that liquidity change moves bond yields, the difference between sterilized and unsterilized interventions, how OMOs and FX swaps fit into the picture, and what the RBI’s record liquidity operations in FY2025\u201326 reveal about this hidden channel.<\/p>\n\n\n\n
When the Reserve Bank of India sells US dollars in the spot market to support the rupee, it withdraws equivalent rupees from circulation, instantly shrinking banking system liquidity. This hidden drain tightens short-term funding, raises G-sec yields,<\/a> and forces the RBI to execute offsetting operations to restore balance<\/p>\n\n\n\n