MUMBAI: The Reserve Bank of India (RBI) conducted a $10 billion US dollar-rupee swap on Friday, aimed at injecting long-term rupee liquidity into the banking system.
The auction, which saw robust demand, was oversubscribed 1.62 times, with 244 bids received, of which 161 were accepted, totaling $10.06 billion. The settlement will take place on March 4 and March 6.
How Does this swap work?
The RBI conducted a buy/sell forex swap, means that banks sell US dollars to the RBI now and in return, the RBI provides rupees to these banks, adding liquidity to the system.
At the end of the dollar-rupee swap period (3 years), banks will repurchase the same amount of dollars from the RBI, completing the transaction.
Why RBI does this?
The RBI uses such forex swaps to manage liquidity without altering interest rates or resorting to open market operations (OMOs). The primary objective of this move is to enhance rupee liquidity. By injecting a large sum of rupees into the banking system, the swap helps ensure ample liquidity for credit expansion and economic growth.
This also helps stabilise market conditions. At a time when the rupee is under pressure (trading at 87.46 per USD, down 28 paise), this move helps smoothen currency fluctuations.
Moreover, the exercise ease the tight money conditions in the market. The banking system has been experiencing a liquidity crunch, with rising government borrowings and seasonal demand absorbing rupee liquidity. This swap provides a long-term liquidity boost without significantly impacting short-term interest rates.
RBI’s liquidity actions
This isn’t the first such intervention. In January, the RBI infused over Rs1.5 lakh crore into the system through various tools, including a $5 billion forex swap. These actions reflect the central bank’s strategy to balance liquidity needs while ensuring financial stability.
With global economic uncertainties and continued foreign fund outflows, the RBI’s move comes as a timely measure to keep markets stable and support credit availability in the economy.
