RBI injects $10 billion via currency swap to ease liquidity deficit in financial system: Report

The Reserve Bank of India (RBI) injected $10 billion through a currency or foreign-exchange swap auction on Friday, stepping up efforts to ease one of the worst liquidity deficits to hit the country’s financial system. According to Bloomberg, the infusion takes the amount poured into the banking system to $47 billion in February. It is part of RBI’s plan to address the tightness in the money market.

The swap entails the central bank purchasing dollars from banks against the rupees they hold while contracting to sell the greenback at a future date. When the central bank buys dollars, it injects an equivalent quantum of rupee liquidity. After the swap’s result was announced, the rupee extended losses, with the domestic currency down 0.3 per cent to 87.4900 per dollar.

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The cash crunch has been caused partly by the central bank’s intervention in the foreign exchange market to shield the rupee from global volatility amid US President Donald Trump’s threat to impose tariff hikes. The shortfall in the market and liquidity crunch hurts an already slowing economy. 

Liquidity in the financial system has tightened significantly since late 2024, with the deficit climbing to a 14-year high of ₹3.3 lakh crore in January. Since last month, the RBI has taken several steps to replenish the system with funds, including auction-based open-market bond purchases worth ₹1 trillion ($11.5 billion) and an earlier foreign-exchange swap worth $5 billion.

INR vs USD: Rupee extends losses after RBI’s currency swap

The central bank has added ₹1.8 trillion via longer-term repurchase auctions, which are set to reverse in the coming weeks. It also reduced interest rates early this month. The RBI set a cutoff premium of 655.10 paise at Friday’s swap auction. When the swap matures after three years, banks must return rupees to the RBI and the swap premium to receive dollars.

According to Bloomberg-compiled data, the three-year onshore forward premium in the secondary market was last at 698.25 paise. The rupee fell 0.4 per cent to close at 87.5125 per dollar. The rupee logged its fifth straight monthly fall in February, weighed down by foreign portfolio outflows and increased hedging in the onshore and non-deliverable forward markets.

The rupee ended at 87.4950 against the US dollar compared with 87.20 in the previous session. The domestic unit fell one per cent in February and slipped to an all-time low of 87.9. Hence, the RBI conducted a three-year dollar-rupee buy-sell swap auction on Friday, drawing bids 1.6 times the $10 billion notified amount. This follows a $5 billion six-month swap in January.