The Reserve Bank of India (RBI) has announced a $10 billion dollar/rupee forex swap auction scheduled for February 28, aimed at injecting durable rupee liquidity into the banking system. The move comes as liquidity conditions tighten, with a cash deficit of ₹1.7 trillion as of February 20, expected to widen further as the financial year-end approaches.
Three-Year Swap to Provide Long-Term Liquidity
The three-year buy/sell forex swap will settle on March 4, potentially adding around ₹870 billion ($10 billion) into the system. This follows a six-month $5.1 billion swap earlier this year, which had limited impact despite open-market bond purchases by the central bank.
Market experts believe that a three-year liquidity infusion provides stronger financial stability compared to shorter-term measures like repo operations lasting up to two months.
Aditi Gupta, Economist at Bank of Baroda, highlighted the significance of the swap’s extended duration:
“The three-year maturity of the swap indicates that the RBI is looking at injecting more durable liquidity into the system, possibly to ensure proper transmission of future rate cuts, the probability of which has now increased.”
Impact on Banking Liquidity and Bond Market
Despite a repo rate cut earlier in February—the first in nearly five years—analysts noted that inadequate liquidity could prevent lenders from effectively implementing rate reductions. The swap suggests a potential shift in RBI’s forex strategy, reflecting a more accommodative stance on a weaker rupee, as long as depreciation remains controlled.
The swap is expected to impact bond markets, particularly benefiting shorter-duration government securities by creating mild steepening in the yield curve. A senior treasury official indicated that while immediate open-market operations (OMO) may not be required, debt purchases could increase closer to March.
Also read: RBI Imposes ₹68.1 Lakh Fine on Banks, NBFC for Non-Compliance
RBI’s Recent Liquidity Measures
Over the past five weeks, the RBI has infused ₹3.6 trillion in durable liquidity, utilizing a mix of:
- Open market and secondary debt purchases
- Longer-duration repo operations
- Foreign exchange (FX) swaps
With liquidity stress peaking toward the financial year-end, market participants estimate that the RBI may need to inject at least ₹1 trillion more by March to stabilize cash conditions.
The $10 billion swap marks one of RBI’s largest recent liquidity infusions, reinforcing its commitment to managing financial stability and ensuring effective monetary policy transmission.
(This news was first reported by Reuters.)
