The goal of the central bank’s program is to boost the country’s foreign exchange reserves, stabilize the rupee’s value, and offer a long-term answer to the system’s liquidity needs. This is what you should be aware of.
The Reserve Bank of India (RBI) decided on Friday, February 21, to inject rupee liquidity for a longer period of time through another $10 billion dollar-rupee buy-sell swap arrangement, following a $5 billion dollar-rupee exchange less than a month ago. The goal of the central bank’s program is to stabilize the rupee’s value, support the country’s foreign exchange reserves, and offer a long-term answer to the system’s liquidity needs.
Why is it being done?
By offering instant liquidity assistance, the swap mechanism can help stabilize the currency and lessen the strain on the rupee during times of foreign money outflows, according to Dilip Parmar, Research Analyst at HDFC Securities. In addition to preventing excessive currency rate volatility, this short-term respite can boost market confidence. Additionally, it will strengthen the RBI’s dollar reserves at a time when it is intervening in the foreign exchange market to stop the rupee from falling. Next week, the central bank will hold a $10 billion swap auction with a three-year term.
How serious is the liquidity problem?
In January 2025, the Indian financial system faced its most severe cash shortage in almost ten years. On January 23, the liquidity shortfall reached its lowest point in almost 15 years, reaching a record of Rs 3.15 lakh crore. Cash flows in the banking system were greatly impacted by tax outflows, GST payments, the RBI’s FX interventions to maintain the rupee, and currency in circulation (CIC) withdrawals, just as they had been the month before. According to Crisil, the deficit caused banks to become more reliant on market borrowing, which kept interbank call money rates—the interest rates at which banks lend to one another—consistently higher than the 6.50 percent policy repo rate.
In order to stabilize the rupee, the RBI has been selling dollars, which drains the system of an equivalent amount in rupees. As the RBI stepped up its attempts to strengthen the rupee, its outstanding net forward sales of the dollar increased to $67.93 billion as of December 31, 2024. In the spot market, the RBI’s dollar sales stood at $45 billion in the third quarter — $15.15 billion in December 2024, $20.22 billion in November and $ 9.27 billion in October.
From the Reserve Bank’s perspective, the exchange is similar to a straightforward buy-sell foreign exchange transaction. In addition to selling US dollars to the Reserve Bank, a bank also commits to purchasing the equivalent quantity of US dollars at the conclusion of the swap period.
What actions has the RBI taken thus far to address liquidity?
Through debt purchases, FX swaps, and longer-duration repos, the RBI has added more than Rs 3.6 lakh crore in durable liquidity to the banking sector in the past five weeks. Throughout January, the central bank used a number of strategies to bring liquidity into the system, such as holding a number of variable rate repo (VRR) auctions with different tenors and a series of daily VRR auctions from January 16 to January 23. To help alleviate the liquidity shortage, the RBI also announced other measures, including a $5 billion dollar-rupee swap on January 31 and open market operations (OMO) purchase auctions of government securities totaling Rs 60,000 crore and a 56-day VRR auction in February.
