Mumbai: As part of a comprehensive plan to inject over Rs1.5 lakh crore into the banking system, the Reserve Bank of India (RBI) announced on Tuesday that it will conduct a USD/INR buy-sell swap auction worth $5 billion (approximately Rs43,000 crore) on January 31, 2025.
The move follows earlier announcements of Open Market Operations (OMO) purchase auctions of government bonds totaling Rs60,000 crore and a Variable Rate Repo (VRR) auction of Rs50,000 crore.
The liquidity measures, unveiled ahead of the RBI’s upcoming bi-monthly monetary policy meeting, aim to address liquidity tightness in the banking system.
The Monetary Policy Committee is widely expected to deliberate on a possible reduction in benchmark lending rates during the meeting.
In a statement, the central bank said, “The Reserve Bank will be conducting a USD/INR Buy/Sell swap auction of $5 billion for a tenor of six months on January 31.”
How the swap auction works
The swap auction involves banks selling US dollars to the RBI while simultaneously agreeing to repurchase the same amount of dollars at a predetermined rate after six months.
Under the framework, the minimum bid size is $10 million, with subsequent bids in multiples of $1 million. Eligible participants can submit multiple bids, but the total cannot exceed the notified auction amount.
The move aims to inject rupee liquidity into the system while managing foreign exchange reserves effectively.
Other liquidity measures
The RBI also announced OMO purchase auctions wherein Rs60,000 crore worth of government securities will be purchased in three tranches of Rs20,000 crore each on January 30, February 13, and February 20, 2025.
A 56-day variable rate repo (VRR) auction for Rs50,000 crore is scheduled for February 7, 2025.
These measures had a mixed impact on markets, with the stock market reacting positively to the announcements. However, the rupee depreciated by 26 paise to close at 86.57 against the US dollar on Tuesday.
How these measures inject liquidity
USD/INR buy-sell swapt auction:When banks sell dollars to the RBI, they receive rupees in return. This directly increases the availability of rupees in the banking system.
The swap ensures that the liquidity injection is temporary, as the dollars are repurchased by banks at the end of the tenor.
OMO Purchase Auctions:The RBI purchases government securities from the open market, which provides banks and other financial institutions with additional funds.
This also reduces the yield on government bonds, potentially lowering borrowing costs in the economy.
Variable Rate Repo Auction (VRR):Under VRR, banks borrow funds from the RBI by pledging eligible securities as collateral.
The 56-day repo auction provides short-term liquidity to meet funding needs without exerting long-term pressure on money supply.
These measures collectively address liquidity constraints, ensuring banks have sufficient funds to meet credit demands and support economic activity. They also help manage market volatility and maintain financial stability.
