RBI to conduct $10 billion forex currency exchange to infuse liquidity in India’s banking system

The Reserve Bank of India (RBI) will conduct a three-year US dollar-rupee buy-sell swap auction of $10 billion on 28 February to inject liquidity into the banking system.

“In order to meet the durable liquidity needs of the system, the Reserve Bank has decided to inject rupee liquidity for longer duration through long-term USD/INR buy/sell swap,” the central bank said in a statement.

Market participants would be required to place their bids in terms of the premium that they are willing to pay to RBI for the tenor of the swap, based on which the auction cut-off will be decided. This will be the second swap auction by the central bank in 2025, after it infused $5.1 billion through a six-month swap on 31 January.

Under the dollar-rupee swap, RBI will buy dollars from banks in exchange for rupees, which will be released into the system. After six months, RBI will sell the dollars.

The first swap auction was part of a slew of liquidity measures announced by the central bank on 27 January.

Those measures included open market operations (OMO) entailing purchase of government securities worth ₹60,000 crore in three tranches of ₹20,000 crore each. In addition to a $5 billion swap, the regulator also announced a 56-day variable rate repo (VRR) auction for ₹50,000 crore.

India's banking system liquidity was estimated to be in a deficit of about ₹1.7 trillion as of 20 February, as per market participants.

“Looks like there will be more such buy-sell swaps. My only concern is that the moment you are sucking dollars from the market, rupee will further depreciate,” said Madan Sabnavis, chief economist, Bank of Baroda.

The domestic currency is typically determined by external factors such as the strength of the US dollar and the demand supply for the greenback. A fall in supply of the dollar or dollar shortage will automatically lead to depreciation in the rupee, Sabnavis explained.

"The RBI will have their own calculations as to when to go for these buy-sell swaps. A buy-sell swap at a time when you have a liquidity and currency issue must be a measured move by RBI, wherein they would presumably not mind rupee going to even 87-88 per dollar,” he added.

"The three-year maturity of the swap indicates that the RBI is looking at injecting more durable liquidity in the system possibly to ensure proper transmission of future rate cuts, the probability of which also has increased now," Aditi Gupta, an economist with Bank of Baroda told Reuters.

(With inputs from Shayan Ghosh)