Under the swap arrangement, banks will sell US dollars to the RBI and simultaneously agree to buy back the same amount of dollars at the end of the three-year period. (Image generated using AI)
The Reserve Bank of India (RBI) on Wednesday announced a $5 billion dollar-rupee buy/sell swap auction for a tenor of three years to infuse durable liquidity into the banking system amid tight liquidity conditions and continued pressure on the rupee, which has slipped below the 96-mark against the US dollar.
The auction, scheduled for May 26, comes at a time when the Indian currency has witnessed significant depreciation against the greenback due to persistent global uncertainties, rising geopolitical tensions and sustained demand for the dollar in international markets.
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“On a review of current and evolving liquidity conditions, it has been decided to conduct a USD/INR Buy/Sell swap auction of $5 billion for a tenor of three years,” the central bank said in a circular.
Under the swap arrangement, banks will sell US dollars to the RBI and simultaneously agree to buy back the same amount of dollars at the end of the three-year period. The transaction aims to inject long-term rupee liquidity into the financial system without permanently altering the central bank’s foreign exchange reserves position.
The central bank said the swap is in the nature of a simple buy/sell foreign exchange swap from the RBI side. Through the mechanism, banks receive rupee liquidity upfront in exchange for dollars, helping ease liquidity pressures in the banking system.
Market participants will be required to submit bids in terms of the premium they are willing to pay to the central bank for the tenor of the swap.
The RBI said the auction cut-off would be determined on the basis of the premium quoted by participants. The auction would follow a multiple price-based format, under which successful bidders will receive allotments at their respective quoted premiums.
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The minimum bid size for the swap auction has been fixed at $10 million and thereafter in multiples of $1 million.
Analysts said the move aims to ensure adequate liquidity in the banking system while also helping stabilise currency market conditions amid heightened volatility in global financial markets. The measure is also expected to support credit growth and improve liquidity transmission across the financial system.
