RBI's $10 billion swap deal: A strategy to inject liquidity into the economy and strengthen dollar reserves

Why in the NEWS?

• Less than a month after a $5 billion dollar-rupee swap, the RBI announced a $10 billion buy-sell swap to inject long-term rupee liquidity.

Key Points:

• The Reserve Bank of India (RBI) has announced a Dollar-Rupee Swap of $10 billion (about Rs 83,000 crore). 
• This move has been taken with the aim of increasing liquidity in the Indian banking system, maintaining rupee stability and strengthening foreign exchange reserves.
• Earlier, in January 2025, RBI had organized a swap of $5 billion. 
• This shows that maintaining cash flow in the Indian banking system has become a big challenge.

What will you read next in this topic?

• What is the swap mechanism and how does it work?
• Why is this swap necessary?
• What steps has RBI taken so far to improve liquidity?
• Will this swap be successful?
• How beneficial is RBI's swap for Indian economy?

What is the swap mechanism and how does it work?

• This swap done by RBI is a simple foreign exchange buy-sell arrangement, which is completed in two stages:
• Step 1: Sale of dollars and supply of rupees
  • Indian banks sell US dollars to RBI, and are given rupees in return.
  • This deal is settled at the FBIL Reference Rate.
  • RBI deposits rupees in the current account of the successful bidder (bank), and banks deposit dollars in RBI's nostro account.
• Step 2: Repurchase of dollars and return of rupees
  • When the swap period is over (in this case after three years), banks buy back the same amount of dollars.
  • They have to return the rupees along with the swap premium.
  • This process brings additional liquidity into the Indian banking system, thereby stabilizing interest rates and providing relief to the market.

Why is this swap necessary?

Solution to Liquidity Crisis

• In January 2025, India faced the most severe liquidity crisis in the last 15 years.
• On January 23, the liquidity deficit in the banking system reached Rs 3.15 lakh crore.
• Cash flow in the banking system was affected due to GST payments, tax outflows, RBI's foreign exchange market intervention and fall in currency in circulation.
• Banks' reliance on market borrowing increased, due to which the Interbank Call Money Rate remained continuously above the repo rate of 6.50%.
• This swap of RBI is a strategic move to rescue banks from cash shortage and maintain stability in the system.

Stabilizing the exchange rate of rupee

• The exchange rate of rupee has seen huge volatility in the last few months.
• To protect the rupee, RBI intervened in the forex market and sold dollars.
• As of December 31, 2024, RBI's outstanding net forward dollar sales increased to $67.93 billion.
• In the October-December 2024 quarter itself, the RBI sold $45 billion:
  • $15.15 billion in December
  • $20.22 billion in November
  • $9.27 billion in October
• Selling dollars drains rupees from the system, leading to a cash crunch. This new swap mechanism will help balance this problem.

Strengthening Forex Reserves

• India's foreign exchange reserves have been under pressure recently as the RBI has had to sell dollars on a large scale to stabilise the rupee.
• When foreign investors withdraw money from the Indian market, the pressure on the rupee increases and the RBI has to intervene by selling dollars.
• According to Dilip Parmar, Research Analyst at HDFC Securities:
  • "The swap mechanism can help stabilise the currency by providing immediate liquidity support."
  • "This can ease the pressure on the rupee during foreign fund outflows and boost market confidence."
• This move of RBI will be important to keep the Indian currency safe in times of global uncertainty.

What steps has RBI taken so far to improve liquidity?

• RBI has injected liquidity of more than Rs 3.6 lakh crore through various measures in the last five weeks. These include:
  • Variable Rate Repo Auctions conducted
  • Dollar-rupee swap of $5 billion
  • Purchase auction of government securities (OMO - Open Market Operations) worth Rs 60,000 crore
  • Announcement of 56-day VRR auction
• Despite this, the cash crisis is still not completely over, so this new swap of $10 billion is being considered an important step.

Will this swap be successful?

• The availability of cash to the banking system will increase, which will support economic activities.
• The volatility of the rupee will decrease, which will maintain the confidence of foreign investors.
• The dollar reserves will strengthen, which will give RBI more resources for currency stabilization.
• However, this swap is not a permanent solution. RBI will have to focus on more structural measures to control the liquidity crisis in the long term.

How beneficial is RBI's swap for Indian economy?

• RBI's $10 billion swap will provide three major benefits to the Indian economy:
• Increase liquidity - will ease the cash crunch and bring stability to the banking system.
• Prevent Rupee volatility - will balance the impact of foreign investors' outflows.
• Strengthen dollar reserves - RBI will have more resources for currency stabilization.
• If this swap is successful, it will strengthen India's monetary policy and bring stability to the financial market.