RBI Announces $5 Billion Dollar-Rupee Swap Amid Persistent Pressure On Rupee

The Reserve Bank of India (RBI) on Wednesday said it will conduct a $5 billion dollar-rupee buy/sell swap auction with a three-year tenor on 26 May as the central bank continues efforts to manage liquidity conditions and stabilise the domestic currency.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

The move comes as the RBI has been actively selling U.S. dollars from its foreign exchange reserves to curb volatility in the rupee, which has weakened sharply in recent weeks amid elevated crude oil prices and global market uncertainty.

According to the central bank, the decision was taken after reviewing current and evolving liquidity conditions in the banking system.

The rupee has declined more than 6% since tensions escalated in West Asia, with rising crude oil prices adding pressure on India’s import bill. On Wednesday, the domestic currency touched a fresh lifetime low of 96.96 against the U.S. dollar in intra-day trade.

RBI Intervention Impacts Banking Liquidity

Foreign exchange intervention by the RBI typically absorbs rupee liquidity from the banking system because the central bank sells dollars and receives rupees in return. This can tighten liquidity conditions and influence short-term interest rates.

System liquidity, while still in surplus, has moderated in recent sessions. Banking system liquidity surplus currently stands at around ₹1.51 lakh crore, equivalent to nearly 0.6% of total deposits, according to market estimates.

Reuters reported earlier on Wednesday, citing bankers, that the RBI had been selling dollars at an estimated pace of nearly $1 billion per day in recent trading sessions to support the rupee.

Market participants said the proposed swap auction could help offset the liquidity impact of those interventions.

Sakshi Gupta, economist at HDFC Bank, said the swap operation was likely intended to address liquidity pressures arising from foreign exchange market intervention. She added that the measure could also help cool forward premiums in the currency market.

Bond Market Responds Positively

Bond yields softened after the RBI announcement, with traders expecting the operation to support surplus liquidity conditions.

India’s benchmark 6.48% government bond maturing in 2035 ended with a yield of 7.0761% on Wednesday, lower by 3.4 basis points from the previous close.

Alok Singh, Head of Treasury at CSB Bank, said the swap operation could reduce hedging costs by easing upward pressure on forward premiums that had increased over the past two weeks.

The RBI has used dollar-rupee swaps multiple times in recent years as a liquidity management tool. Under such operations, the central bank buys dollars in exchange for rupees and agrees to reverse the transaction after a specified period.

The latest move comes at a time when global energy prices, foreign fund outflows and a strengthening U.S. dollar continue to weigh on emerging market currencies, including the rupee.