The recent swap auction conducted by the central bank is part of its latest measures to infuse Rupee liquidity amounting to Rs 1.50 lakh crore into the banking system, as announced on January 27, 2025.
At the auction, the RBI received bids totaling $25.59 billion from 253 participants, surpassing the notified amount of $5 billion. Eventually, bids worth $5.10 billion were accepted at a weighted average premium of 97.72 paise, leading to an injection of an equivalent amount of Rupee liquidity into banks.
In the first phase of the swap transaction, banks sold US Dollars to the RBI, which will credit the Rupee funds to the successful bidders’ current accounts. The reverse leg of the swap transaction will see the return of Rupee funds, along with the swap premium, to the RBI after six months to retrieve the US Dollars.
Harsimran Sahni, EVP – Head Treasury at Anand Rathi Global Finance, stated that the market had anticipated action on Rupee liquidity through OMO purchases or USD/INR Swap due to the existing deficit. Therefore, the impact on the USD/INR exchange rate was not significant following the RBI’s announcement. However, he suggested that if the RBI continues with longer-term USD/INR Swaps, the Rupee might gradually depreciate.
The liquidity injection through the USD/INR swap is expected to alleviate short-term liquidity in the banking system, leading to lower short-term interest rates. This is likely to decrease short-term government bond yields but may have limited impact on longer-term papers unless the RBI signals further liquidity measures or a repo rate cut in the upcoming MPC policy.
Amit Pabari, MD of CR Forex Advisors, explained that the central bank’s swap auction involved the purchase of spot dollars to inject rupee liquidity while simultaneously selling dollars in the forwards to balance the impact on the USD/INR pair. He noted that the influence of various global and domestic factors, including the Union Budget for FY26, on the Rupee remains uncertain.
Pabari added that increased government spending could raise Rupee supply, leading to depreciation, while strategic investments and policy reforms may attract FII inflows, providing support to the currency. The impact of these factors, including the swap auction, will shape the trajectory of the Rupee in the coming days.
