Source Reuters
The Reserve Bank of India (RBI) has reportedly tapped more than $2 billion through foreign exchange (FX) swap operations to soften the impact of rupee liquidity tightening caused by its recent spot market interventions, according to bankers familiar with the matter.
Market participants said the central bank conducted dollar-rupee swap transactions after selling dollars in the spot market to curb excessive volatility in the local currency. Such spot interventions typically drain rupee liquidity from the banking system, prompting the RBI to use swaps as a balancing tool to maintain adequate cash conditions.
FX swaps allow the RBI to inject rupees into the system while managing dollar liquidity, without altering its broader monetary policy stance. Bankers noted that the recent swap volumes exceeded $2 billion, reflecting the central bank’s intent to prevent a sharp squeeze in short-term funding rates.
The rupee has faced intermittent pressure amid global uncertainty, shifting expectations on US interest rates, and portfolio outflows from emerging markets. In response, the RBI has remained active in currency markets, aiming to smooth volatility rather than defend any specific exchange rate level.
Liquidity conditions in India’s banking system have tightened in recent weeks due to tax outflows, government cash balances, and forex operations. Analysts said the RBI’s use of FX swaps underscores its preference for targeted liquidity management tools instead of broad-based measures such as large open market operations.
Bankers added that further swap operations cannot be ruled out if currency market pressures persist or if rupee liquidity tightens further. The RBI is expected to continue calibrating its interventions to ensure orderly market conditions while supporting financial stability.
