The Indian forex market has once again shown a high degree of volatility in the recent years. However, many developments in the open market operations taking place in the Indian forex market have brightened the future prospects for the Indian economy significantly in the current financial year. As such, many possible circumstances would also be supported by Market Sterilization Schemes to play an important role towards the forex market volatility and thus maintaining the overall liquidity in the system.

In recent years, India has experienced a considerable surge in forex inflows. With the objective of neutralizing the impact of excess forex flows, the RBI has interfered in the foreign exchange market at regular intervals. RBI plays a significant role in maintaining the domestic price stability as against the forex market volatility and thus ensuring overall liquidity in the system. This is achieved through the process of sterilization. Sterilization refers to the central bank’s activity in the domestic market to reduce the impact on money supply by its intervention in the forex market. There is always a cost and benefit involved in the process of sterilization. The various instruments of sterilization have different impact on the balance sheet of central bank as well as on the financial sector and the government.

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