RBI Carries Out Currency Swaps Worth at Least $10 Billion to Reduce Liquidity

The Reserve Bank of India (RBI) has carried out dollar-rupee currency swaps worth at least $10 billion in recent weeks as it works to absorb excess cash from the banking system. 

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The transactions were conducted with lenders over the past two weeks and included maturities ranging from one month to around six months, according to people familiar with the developments cited in the report. 

The move comes at a time when India’s banking system has been dealing with a large liquidity surplus following substantial foreign capital inflows. 

How the currency swaps work 

The RBI has used sell-buy dollar-rupee swaps for these operations. 

In this case, the central bank sells dollars to the banks and gets rupees in exchange, with the promise that it will reverse the deal at a future date. Rupees obtained by the RBI in the process get withdrawn from circulation for the period of the swap operation, thus lowering the amount of liquidity in the banking system. 

Swap market activity has also shown up in dollar-rupee contract rates. Three to six-month contract rates have increased in September. 

On Thursday, six-month and one-year rates were up about 20 basis points to their highest level since May. 

Recent swaps larger than earlier publicly announced operations 

The scale of the latest transactions is larger than similar swap operations publicly announced by the RBI in recent years. 

Public swap auctions have typically been conducted in tranches of around $3 billion to $5 billion. The latest transactions come against the backdrop of a much larger cash surplus in the banking system. 

The RBI did not comment on the transactions when contacted, according to the report. 

Banking liquidity had touched record ₹11 trillion 

The build-up in liquidity followed measures by the central bank to attract foreign capital. 

These measures brought in more than $140 billion, exceeding official expectations. As the money entered the financial system, surplus banking liquidity climbed to a record ₹11 trillion, equivalent to about $115 billion, earlier in September. 

The excess cash contributed to lower borrowing costs at a time when higher oil prices were adding to inflation concerns. 

The RBI has been using more than one route to manage the liquidity build-up, including bond sales alongside sell-buy currency swaps. 

RBI continues to manage surplus cash 

The latest currency swaps add to the steps taken by the central bank to withdraw excess liquidity from the financial system. 

The report said the RBI may have conducted sell-buy swaps of around $10 billion to $15 billion that mature within the current financial year ending March 31. 

For now, the confirmed scale cited in the report is at least $10 billion over recent weeks, with the transactions spread across maturities of between one month and roughly six months. 

The operations allow the RBI to temporarily withdraw rupees from banks while reversing the dollar transactions at their respective maturity dates.