Sterilisation
Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"
Meaning
Sterilisation means that the central bank protects the domestic money supply from external shocks, such as large inflows of foreign exchange. When the RBI buys dollars, it pays in rupees, and this adds rupees to the economy. To stop this extra money from pushing up inflation, the RBI takes it back out through a second action. The Class 12 text says the RBI "sterilises the money supply … against external shocks".
Example
Foreign investors bring in dollars, and the RBI buys them to stop the rupee from rising too fast. This adds rupees to the system. The RBI then sells government bonds, or uses Market Stabilisation Scheme bonds or an Incremental CRR, to absorb the same amount of rupees. The net effect on money supply is close to zero.
Don't confuse with
- Unsterilised intervention: the RBI buys or sells dollars but does not offset the rupee effect, so domestic money supply changes.
Related concepts
- Long-Term Repo Operations
- Forex swap auction
- Market Stabilisation Scheme
- Incremental Cash Reserve Ratio
- Demonetisation