A connection is shown to exist between the mesoscale eddy activity around Madagascar and the large-scale interannual variability in the Indian Ocean. We use the combined TOPEX/Poseidon-ERS sea surface height (SSH) data for the period 1993--2003. The SSH-fields in the Mozambique Channel and east of Madagascar exhibit a significant interannual oscillation. This is related to the arrival of large-scale anomalies that propagate westward along 10¿--15¿S in response to the Indian Ocean dipole (IOD) events. Positive (negative) SSH anomalies associated to a positive (negative) IOD phase induce a shift in the intensity and position of the tropical and subtropical gyres. A weakening (strengthening) results in the intensity of the South Equatorial Current and its branches along east Madagascar. In addition, the flow through the narrows of the Mozambique Channel around 17¿S increases (decreases) during periods of a stronger and northward (southward) extension of the subtropical (tropical) gyre. Interaction between the currents in the narrows and southward propagating eddies from the northern Channel leads to interannual variability in the eddy kinetic energy of the central Channel in phase with the one in the SSH-field.