RBI Executes $10 Billion Currency Swaps To Drain Surplus Liquidity And Manage Inflation Risks

The Reserve Bank of India (RBI) has conducted currency swaps worth at least $10 billion in recent weeks as part of efforts to reduce excess liquidity in the financial system and manage inflation concerns.

According to a report by Bloomberg, the central bank carried out sell-buy dollar-rupee swaps with lenders over the past two weeks, with contracts ranging from one month to nearly six months.

These transactions help absorb rupee liquidity by taking funds from banks while providing dollars temporarily.

RBI uses swaps to absorb excess cash

Under a sell-buy swap arrangement, the RBI sells dollars to banks and agrees to buy them back at a future date. The process removes rupees from circulation, helping the central bank manage surplus liquidity conditions.

Market participants said dollar-rupee forward rates for three-month and six-month contracts have increased this month, reflecting the impact of RBI’s operations. The six-month and one-year swap rates rose further on Thursday, reaching their highest levels since May.

The scale of the recent swaps is larger than similar publicly announced measures in recent years, indicating the extent of surplus liquidity in the banking system. The RBI has generally conducted swap auctions in smaller tranches of around $3 billion to $5 billion.

Foreign inflows push liquidity surplus higher

Banks have accumulated significant cash after RBI measures aimed at attracting foreign capital resulted in inflows exceeding $140 billion.

The liquidity surplus reached a record ₹11 trillion earlier this month, putting downward pressure on borrowing costs while adding to inflation concerns amid elevated oil prices.