The Reserve Bank of India (RBI) has conducted more than $2 billion in dollar/rupee FX swaps over the last two days to offset the liquidity drain caused by spot dollar sales, according to a Reuters report.
The transactions suggest the central bank is aiming to contain currency pressures while avoiding a sharper squeeze in banking system liquidity.
The RBI has stepped up spot market intervention as the rupee faces pressure from equity outflows, higher demand linked to bullion imports, and increased hedging activity.
The currency slid 0.8% on Wednesday to an all-time low of 91.7425, highlighting the extent of volatility building in the market.
Spot dollar sales tighten liquidity
Spot dollar sales can help smooth excessive rupee swings, but they also absorb rupees from the banking system. This becomes more significant when liquidity conditions are already fragile.
India’s banking system liquidity has intermittently slipped into deficit in recent weeks, despite the RBI’s bond purchases and earlier FX swap operations.
A few bankers said cash conditions have come under increasing pressure as spot intervention has intensified.
On Wednesday, banking system liquidity slipped into a deficit of around 60 billion rupees ($655.4 million).
FX swaps add rupee funds
Dollar/rupee buy-sell FX swaps are one way the RBI can counter the liquidity impact of spot intervention.
In such transactions, the first leg is settled at the spot date and the second leg at a future date, helping replenish rupee liquidity while the RBI continues to supply dollars in the spot market.
Reuters states that bankers said the RBI conducted FX swaps on Tuesday and Wednesday across various maturities. While estimates of the overall size differed, one banker pegged it at more than $3 billion, with other estimates starting at around $2 billion.
Market participants said the RBI regularly uses swaps alongside spot intervention, but bankers described this week’s buy-sell volumes as unusually large compared with past episodes.
Swaps lower hedging costs
The RBI’s swap activity also affected the cost of hedging dollar exposure.
In periods of currency weakness, forward premiums tend to rise, driven by greater demand for protection and higher implied borrowing costs.
According to bankers, the RBI’s swaps helped ease upward pressure on forward premiums by lowering hedging costs.
The implied yield on the one-year dollar/rupee premium fell by about 10 basis points over the last two days, slipping further on Thursday.
This shift offered relief to companies and investors managing currency risk, especially during a phase when volatility in the rupee has increased, and hedging demand has remained elevated.
More swaps may follow
A senior treasury official at a private sector bank said in the report that the RBI may need to conduct buy-sell swaps on a regular basis, considering how frequently it has been intervening in the spot market and the persistent liquidity scarcity.
The remark reflects a challenge the RBI faces while managing currency volatility.
Spot intervention can help curb sharp rupee moves, but it can also tighten cash conditions unless supported by measures such as FX swaps.
By scaling up swap operations, the central bank appears to be trying to keep liquidity stress from worsening while continuing to respond to rupee pressures driven by outflows, import demand, and hedging activity.
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