RBI’s $10-Bn Swap Auction For Liquidity Push

While the historical data might’ve supported this move, the current realities are very different. The rapidly evolving landscape of geopolitics and global markets make this move optimistic and hopeful. That said, the impact on interest rates, borrowings and prices are extremely difficult to predict - MV Hariharan, Ex Treasury Head, SBI

Mumbai: The Reserve Bank of India (RBI) has recently announced that it will go for a $10-billion USD/INR Swap Auction. What does this mean for liquidity, forex reserves, bond yields, interest rates, and the stock market?

Well, A USD/INR Buy-Sell Swap is when RBI buys USD from banks and promises to sell it back later or after three years in this case. Think of it as RBI ‘borrowing’ United States dollars now and ‘repaying’ later in Indian rupees.

In the process, short-term INR supply will increase, and more rupees will come into the system. However, in the long-term, INR supply will decrease when RBI absorbs INR, while selling USD later. This is an indirect way to manage liquidity without changing interest rates.

The key reason behind this $10 billion swap auction is injecting liquidity. India’s banking system faces a Rs1.7 trillion liquidity deficit. RBI wants to ease this without cutting interest rates. India’s forex reserves are at $637 billion but need strong buffers for global uncertainty.

Too much volatility in INR/USD hurts businesses and investors. By managing USD flows, RBI ensures stable INR exchange rates. Moreover, RBI is balancing liquidity support versus inflation risks.

Talking to Bizz Buzz, MV Hariharan, ex treasury head, State Bank of India (SBI) says: “While the historical data might’ve supported this move, the current realities are very different. The rapidly evolving landscape of geopolitics and global markets make this move optimistic and hopeful. That said, the impact on interest rates, borrowings and prices are extremely difficult to predict. The US President is busy upending the global order as we know it, with active support from various leaders worldwide.”

However, the wiggle room for RBI is quite narrow and limited. The US tariffs imbroglio is already seen to threaten many balance sheets, both globally and locally, he said.

Anil Kumar Bhansali, Head of Treasury & Executive Director, Finrex Treasury Advisors, said: “In a move aimed to improve the liquidity in Indian market, which has been facing a deficit of Rs1.7 lakh crore as on February 20, the RBI has planned a long-term forex buy sell swap, which will help the markets gain rupees by 86,000 crore and thus ease the position to some extent.”

Market estimates an amount of at least Rs1.25 lakh crore is required in March to ease conditions. The swap was done on Feb 28, while the reverse swap will be due on March 6, 2028. RBI has been infusing funds through VRRR (Variable Rate Reverse Repo), bond repurchases and a swap done for six months for a sum of $5 billion. The funds infused through VRRR provide only short-term liquidity, while those through bond repurchases are permanent liquidity source. RBI has purchased bonds worth Rs1,44,000 crore and induced Rs44,000 crore via the six-month swap. However, call money rates remain above repo rate due to constant liquidity deficits, he said.

RBI also infused Rs1.8 lakh crore through long-term repos maturing in April and may roll them by further two months. Under the swap, banks will sell US dollars to RBI and repurchase them back three years hence.