Mumbai: The Reserve Bank of India today saw strong demand its foreign currency buy/sell swap auction amid persistently tight liquidity deficit in the banking system.
The central bank auctioned three-year dollar/rupee buy/sell swaps worth $10 billion. The central bank received 244 bids worth $16.23 billion and accepted 161 bids worth $10.06 billion at the auction. This was the biggest quantum for a dollar/rupee swap auction by the RBI on record.
“There is robust demand for long tenor swap auction. This will enable durable liquidity in the system. RBI will try to keep deficit in the system around ₹1-1.5 trillion and will use instrument like OMO (open marekt operations) buy/ Fx swap and if needed may be CRR (cash reserve ratio) as well,” Gopal Tripathi, President and Head, Treasury and Capital Markets at Jana Small Finance Bank told Mint. He added that RBI may also like to switch from its short term buy/sell swap to longer tenor swaps gradually to ensure durable liquidity.
The central bank is expected to keep liquidity in deficit to manage the domestic currency which continues to be volatile and faces depreciation pressures. A large part of the liquidity crunch in the system has been due to repeated interventions by the regulator in the foreign exchange market to protect the rupee against sharp bouts of depreciation amid global and geo-political uncertainty and threat of US-imposed tariffs, according to industry experts. The deficit had touched a 14-year high of ₹3.3 trillion in January 2025 and is currently estimated to be in a deficit of over ₹1.5 trillion.
Foreign exchange swaps entail RBI purchasing dollars from banks against rupees held by them, thus infusing liquidity into the system. It then sells back the dollars at a later date–in this case three years. The rupee extended losses after the result of the swap was announced, closing 0.4% lower at 87.5125 per dollar.
Liquidity measures
RBI had announced this three-year swap auction on 21 February, 2025 with the objective of meeting the “durable liquidity needs of the system”, it had then said. This was the second swap auction by the central bank in 2025, after it infused $5.1 billion through a six-month swap on 31 January.
The first swap auction was part of a slew of liquidity measures announced by the central bank on 27 January. Those measures included open market operations (OMO) entailing purchase of government securities worth ₹60,000 crore in three tranches of ₹20,000 crore each. In addition to a $5 billion swap, the regulator also announced a 56-day variable rate repo (VRR) auction for ₹50,000 crore.
Through these measures, the RBI is estimated to have infused a total of at least ₹3.2 trillion into the system, a recent report by CareEdge said, adding that while these steps have helped improve liquidity, “overall conditions remain tight”. Further measures are needed to ease liquidity and support the transmission of RBI rate cuts, it added. The central bank cut the policy repo rate by 25 basis points on 7 February 2025.
“Liquidity will continue to remain a challenge and RBI will continue to look at tools they can use to infuse liquidity into the system. Core liquidity itself has gone down significantly. The government cash surplus balance is also not very high and financial year capital requirements are generally higher. So RBI will need to do more OMOs or these long-term buy/sell swaps for some more time, of around ₹1 trillion more or so,” said a senior level banker.
