RBI’s large-scale market interventions raise questions over policy coherence and transparency

The RBI’s extensive actions in currency and bond markets blur the lines between stabilisation efforts and market influence, prompting calls for clearer guidance on trade-offs amid the complex trilemma of monetary policy.

The Reserve Bank of India says it does not aim for any particular level in the dollar-rupee exchange rate, but its actions in currency markets have often been too large and too persistent to be described as mere efforts to smooth volatility. That has revived a wider question: what, exactly, should guide intervention when the central bank is also active in bond markets and liquidity management?

According to Business Standard, the RBI’s foreign-exchange operations have averaged about $60 billion a year over the past decade, with especially forceful buying in FY21 and FY22 and heavy selling in FY25 and FY26. Those moves have clearly affected the path of the rupee, not just its day-to-day swings. In that sense, the central bank has been shaping the exchange rate even while insisting that it is not targeting one.

The same issue applies to interest-rate policy. Outside the Monetary Policy Committee, the RBI has used bond purchases, liquidity injections and other market operations to support monetary transmission. Business Standard notes that in FY26 the central bank accounted for a sizeable share of the increase in government debt held by domestic investors, helping keep borrowing costs lower than they might otherwise have been. But that support has also had side-effects: weaker returns on fixed income can push savers into equities, compress yield differentials and add pressure on the currency.

The result is a policy mix that can pull in different directions. Business Standard argues that the trilemma, which describes the tension between exchange-rate stability, free capital movement and independent monetary policy, offers a useful framework for thinking about these trade-offs. The point is not that the RBI should surrender discretion or begin fixing the rupee. It is that large interventions across markets should be judged together, because action in one area inevitably affects the others.

That broader perspective is also visible in the RBI’s recent liquidity management. Business Standard reported in March that the central bank announced ₹1 trillion in open market operations to offset tightening from advance tax outflows, while another report said bond traders’ sensitivity has limited its room to withdraw liquidity abruptly. More recently, according to LiveMint, Governor Sanjay Malhotra said liquidity policy would remain pre-emptive and take account of currency movements and foreign-exchange intervention. The message is that the RBI is already managing these linkages in practice, even if they are not always explained in a single framework.

That is why the article’s argument matters beyond academic theory. If the RBI is using large-scale intervention to influence the rupee, support bond markets and maintain banking-system liquidity, it should also be explicit about the trade-offs involved. Greater clarity would not eliminate discretion, but it could make policy more coherent and reduce speculation about why the central bank is acting as it does. The impossible trinity cannot be escaped; it can only be managed with more consistency and candour.