After conducting a $5 billion dollar-rupee swap lower than a month in the past, the Reserve Financial institution of India (RBI) on Friday (February 21) determined to inject rupee liquidity for longer period by one other $10 billion dollar-rupee buy-sell swap association. The central financial institution’s initiative is designed to supply a sturdy answer to the system’s liquidity necessities, whereas additionally stabilising the worth of the rupee and bolstering the nation’s overseas change kitty.
Why is it being achieved?
Dilip Parmar, Analysis Analyst, HDFC Securities, stated the swap mechanism may also help stabilize the forex by offering instant liquidity assist, thereby mitigating the strain on the rupee during times of overseas fund outflows. This momentary aid can bolster market confidence and stop extreme volatility within the change price. It is going to additionally beef up the greenback reserves of the RBI at a time when it’s intervening within the foreign exchange market to stop a slide within the rupee. The central financial institution will likely be conducting the $10 billion swap public sale for a tenor of three years subsequent week.
How critical is the liquidity drawback?
The Indian banking system encountered its worst liquidity crunch in additional than a decade in January 2025. The liquidity deficit peaked at Rs 3.15 lakh crore on January 23, its lowest degree in practically 15 years. As was the case within the previous month, tax outflows, GST funds and the RBI’s foreign exchange interventions to stabilize the rupee and forex in circulation (CIC) outflows considerably impacted money flows within the banking system. The deficit led to elevated dependence by banks on market borrowing, thereby maintaining interbank name cash charges — price at which banks lend to one another — persistently above the coverage repo price of 6.50 per cent, in accordance with Crisil.
The RBI has been promoting {dollars} to stabilise the rupee, thereby sucking out an equal quantity in rupee from the system. RBI’s excellent internet ahead gross sales of the greenback surged to $67.93 billion as of December 31, 2024, because the central financial institution intensified its efforts to stabilize the rupee. Within the spot market, the RBI’s greenback gross sales stood at $45 billion within the third quarter — $15.15 billion in December 2024, $20.22 billion in November and $ 9.27 billion in October.
How does swap work?
The swap is within the nature of a easy buy-sell overseas change swap from the Reserve Financial institution aspect. A financial institution will promote US {dollars} to the Reserve Financial institution and concurrently agrees to purchase the identical quantity of US {dollars} on the finish of the swap interval.
Within the first leg of the transaction, the financial institution will promote {dollars} to the Reserve Financial institution at FBIL Reference Charge of the public sale date. The settlement of the primary leg of the swap will happen on spot foundation from the date of transaction and the Reserve Financial institution will credit score the rupee funds to the present account of the profitable bidder and the bidder must ship {dollars} into the RBI’s nostro account. Within the reverse leg of the swap transaction, rupee funds must be returned to the Reserve Financial institution together with the swap premium to get the {dollars} again.
What had been the RBI measures to fulfill liquidity up to now?
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The RBI had infused over Rs 3.6 lakh crore of sturdy liquidity into the banking system within the final 5 weeks by debt purchases, foreign exchange swaps and longer-duration repos. The central financial institution resorted to a number of measures through the course of January to inject liquidity into the system, together with a number of variable price repo (VRR) auctions of various tenors and a sequence of day by day VRR auctions carried out between January 16 and January 23. The RBI additionally introduced extra measures, similar to a $5 billion dollar-rupee swap on January 31, in addition to open market operations (OMO) buy auctions of presidency securities aggregating Rs 60,000 crore and a 56-day VRR public sale scheduled in February, to assist overcome the tightness in liquidity.
