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The RBI has announced a huge $10-billion dollar-rupee swap auction programme to inject durable liquidity in the banking system, which will take place on February 28 for a period of three years.
The RBI has been infusing funds through VRRR (variable reverse repo rate), bond repurchases and a swap done for six months for a sum of $5 billion.
RBI Forex Swap: Even as the Reserve Bank of India (RBI) is set to conduct a $10-billion buy-sell rupee-dollar swap on February 28 (Friday) to boost rupee liquidity in banks, India’s short-term government securities (GSec) yields and one-year dollar-rupee forward premium have declined. The RBI forex swap is aimed at shoring up liquidity in the system at a time when the banking sector has been reeling under a cash deficit.
RBI Forex Swap: What Is the News?
The RBI last week announced a huge $10 billion dollar-rupee swap auction programme to inject durable liquidity in the banking system. Under this, the RBI will inject rupee in the banking sector while taking dollars from them. This will boost rupee liquidity in banks.
The auction will take place on February 28 for the swap for a period of three years. After three years, the reverse swap will take place. It means the RBI will take back the rupee and give banks the dollars.
“In order to meet the durable liquidity needs of the system, the Reserve Bank has decided to inject Rupee liquidity for longer duration through long-term USD/INR Buy/Sell swap. Accordingly, the Reserve Bank will be conducting a USD/INR Buy/Sell swap auction of $10 billion for a tenor of 3 years,” the RBI said in a statement last week.
Why Is It Important?
The move aims to boost the rupee availability in the banking system, thus allowing banks to be more financially healthy and to have more funds for lending.
Anil Kumar Bhansali, head of treasury and executive director at Finrex Treasury Advisors LLP, told news18.com, “In a move aimed to improve the liquidity in Indian markets which has been facing a deficit of Rs 1.7 lakh crore as on February 20, 2025, the RBI has planned a long-term forex buy-sell swap which will help the markets to gain the rupees by Rs 86,000 crore and thus ease the position to some extent.”
He added that market estimates that an amount of at least Rs 1.25 lakh crore is required in March to ease conditions. The swap will be done on February 28 for the value date of March 4. However, the reverse swap will get due on March 6, 2028.
RBI Rupee-Dollar Buy-Sell Swap: How Does It Work?
Under the dollar-rupee swap auction, a bank shall sell US dollars to the RBI and simultaneously agree to buy the same amount of US dollars at the end of the swap period (in this case, three years).
It is done through an auction under which each bank quotes their swap rates (forward premium or discount) and the lowest bidder is accepted first under the programme.
Auction Process:
The RBI typically conducts buy/sell or sell/buy swap auctions where banks participate by quoting their swap rates (the forward premium or discount).
The bids are ranked based on these rates, and the RBI accepts bids in a cut-off method (similar to a G-sec auction).
Allocation of Rupees/Dollars:
If it’s a dollar-rupee sell/buy swap, banks bid for how much premium they are willing to pay to get rupees in exchange for dollars. The lowest premium (cheapest cost for RBI) is accepted first.
If it’s a dollar-rupee buy/sell swap, banks bid based on how much premium they demand from the RBI to return dollars later. The lowest premium is again preferred.
What Is Forward Premium, Why Is It Important?
Forward premiums are a factor that companies take into account while making their decision on hedging their foreign exchange risks. A drop in forward premiums reduces the hedging cost of dollar payments that are due in the future.
Meanwhile, lower shorter-duration yields are beneficial for corporates and non-banking financial companies as they mainly borrow through such papers. Corporate bond yields track government counterparts, and a drop in yields reduces the borrowing cost of companies.
The 1-year dollar/rupee forward premium on Monday (February 24, 2025) dropped 12 basis points to 1.99%, its lowest since the first week of December.
The benchmark 10-year bond yield was barely changed, while yields on the four-year to five-year bonds were down 2 basis points, with traders anticipating further declines.
The 1-year overnight index swap (OIS) rate fell to near a 30-month low.
Has RBI Done This In The Past?
The RBI has been infusing funds through VRRR (variable reverse repo rate), bond repurchases and a swap done for six months for a sum of $5 billion, Finrex’s Bhansali said.
In January also, the RBI had announced liquidity injection worth over Rs 1.5 lakh crore through different instruments, including $5 billion forex swap.
