RBI $5 Billion Dollar-Rupee Swap Explained: Impact on Liquidity and Rupee

India’s central bank, the Reserve Bank of India (RBI), has stepped in to ease tight liquidity in the banking system through two major actions — large bond purchases and a $5-billion dollar-rupee swap.

RBI Bond Purchase: What Happened?

The RBI bought Rs 500 billion (Rs 50,000 crore) worth of government bonds as planned. These bonds had maturities ranging from 2029 to 2050.

Demand was strong. The prices accepted by the RBI were mostly higher than what markets expected, which led to a fall in bond yields after the auction results were announced.

This bond purchase is part of the RBI’s larger plan to inject Rs 1 trillion of liquidity into the system this month.

Why Is RBI Adding Liquidity Now?

Liquidity has tightened because:

• The RBI has been selling dollars to reduce excessive rupee volatility
• Seasonal factors like tax outflows have drained cash from banks
• The rupee has been under pressure this year

Together, these factors reduced the amount of rupees available with banks, prompting RBI action.

USD-INR Buy/Sell Swap Explained in Simple Terms

Alongside bond purchases, the RBI conducted a $5-billion USD-INR buy/sell swap with a three-year tenure.

This sounds complex, but it is best understood as a temporary exchange of currencies between the RBI and banks.

How the Swap Works

• Banks give dollars to the RBI today
• In return, banks receive rupees they can use for lending and funding
• After three years, banks return the rupees at a pre-decided cost
• The RBI gives back the dollars to banks

Why Would Banks Enter This Deal?

For banks, this swap works like borrowing rupees at a predictable cost.

Currently:

• 3-year US dollar funding cost is around 4%
• Implied rupee depreciation is about 2.8%

This means the effective rupee funding cost for banks comes to roughly 7%, which is considered reasonable. This makes the swap attractive and explains the strong participation.

Is RBI Defending the Rupee?

Importantly, this swap is not a direct currency defence tool.

The RBI’s main goal is to inject rupee liquidity into the banking system, while managing volatility in an orderly manner.

Bottom Line

Through bond purchases and the USD-INR swap, the RBI is ensuring that banks have enough cash to lend and operate smoothly. These steps help stabilize markets, support growth, and prevent short-term liquidity stress — without signaling panic or a hard defence of any specific rupee level.