India's RBI announces mega $10 billion FX swap to infuse rupee liquidity

Reuters

21-02-2025

MUMBAI, Feb 21 (Reuters) - The Reserve Bank of India will conduct a massive $10 billion three-year dollar/rupee swap auction next week to infuse durable rupee liquidity into the banking system, which has been reeling under large cash deficits, the central bank said on Friday.
The RBI will conduct the buy/sell swap on February 28, it said in a release. The first leg of the transaction would be settled on March 4 and could infuse around 870 billion rupees ($10 billion) into the banking system.
Earlier this year, the RBI announced a six-month swap through which it infused $5.1 billion into the system, however, cash conditions have remained tight despite the swap and several open-market bond purchases.
The RBI will need to inject at least another 1 trillion rupees into the banking system by March-end, market participants said earlier on Friday.
Investors said three-year liquidity infusion is more assuring compared to a six-month, and far better than up to two-month repo infusions.
"The three-year maturity of the swap indicates that the RBI is looking at injecting more durable liquidity in the system possibly to ensure proper transmission of future rate cuts, the probability of which also has increased now," said Aditi Gupta an economist with Bank of Baroda.
The RBI also cut the repo rate for the first time in nearly five years earlier in February, but without sufficient cash in the banking system, rate cuts will not be effectively implemented by lenders, analysts said.
"This also suggests a possible shift in RBI's forex strategy, indicating a greater tolerance for a weaker currency as long as the depreciation is gradual and measured," Gupta said.
The RBI has infused more than 3.6 trillion rupees of durable liquidity into the banking system in last five weeks through a combination of open market as well as secondary debt purchases, longer-duration repos, and an FX swap.
The three-year swap would also be positive for shorter-duration government bonds and could lead to mild steepening in the yield curve, a senior treasury official said.
"There may not be any immediate need for OMO purchase, but going into March, we could see some debt buying," the official said.
India's banking system liquidity deficit was around 1.7 trillion rupees as of February 20 and is set to widen further moving into the last month of the financial year when liquidity stress is maximum.
($1 = 86.6250 Indian rupees)