Why Central Banks Never Get Everything They Want
From the outside, central banks look all-powerful. They change interest rates, manage currencies, and calm markets when panic strikes. But inside, their job is closer to damage control than control itself.
At the heart of the problem is a simple reality: money moves every day. Tax refunds flood banks with cash. Government spending drains it. Foreign investors bring dollars in, then suddenly pull them out. Left alone, this chaos would make overnight interest rates jump wildly.
To manage this, central banks face a trilemma. They can choose only two of three good things:
tightly controlled short-term interest rates,
a small balance sheet,
minimal day-to-day intervention.
Never all three.
India’s Reserve Bank of India makes its choice very clear. Its priority is keeping the overnight borrowing rate (WACR) close to the repo rate. To do that, it intervenes constantly — injecting or absorbing liquidity, using rate corridors, repos, and standing facilities. This keeps rates stable, but it also means a large RBI balance sheet and frequent market involvement.
Why so active? Because India is an emerging market. Foreign capital flows in fast during optimism and leaves even faster during fear. When the RBI manages the rupee in FX markets, it automatically disturbs domestic liquidity — forcing it to step in again to “sterilise” the impact.
So the RBI doesn’t intervene because it wants to. It intervenes because it has to. Stability comes at the cost of size and constant action.
HDFC Bank