RBI Uses FX Swaps Amid Rupee Pressure

India’s central bank undertook short-term sell-buy foreign-exchange swaps in September, using the currency derivatives market to adjust domestic liquidity conditions. Under these transactions, the central bank sold US dollars to banks in exchange for rupees while committing to repurchase the dollars at a later date.

By structuring the operations as sell-buy swaps, the central bank temporarily withdrew rupees from the banking system, with the impact reversing when the swaps mature. Some of the contracts linked to these operations are scheduled to mature in October, at which point rupee liquidity will be re-injected as the dollars are bought back.

These swaps highlight the use of foreign-exchange instruments as an additional tool alongside conventional money market operations to fine-tune liquidity. The approach allows authorities to address short-term liquidity imbalances without making permanent changes to the balance sheet.

Market participants reported that the rupee had been under pressure in recent trading sessions. They cited rising crude oil prices and outflows of US dollars as key drivers of the currency’s weakness, contributing to concerns about further depreciation.

Traders indicated that the central bank’s foreign-exchange operations were intended to counter an oil- and outflow-driven fall in the rupee. By selling dollars and absorbing rupees, the swaps can support the domestic currency while simultaneously tightening excess liquidity.

Reports from trading desks described the rupee moving lower during the session before stabilising after signs of central bank intervention. While specific price levels and volumes were not formally disclosed, market commentary linked the timing of the swaps to this shift in trading dynamics.

The use of FX swaps in this context signals an emphasis on managing both currency stability and short-term liquidity through market-based operations. The temporary nature of the swaps gives policymakers flexibility to respond to changing external conditions, such as developments in global oil markets or capital flows.

At the same time, the reliance on swaps underscores the sensitivity of the domestic currency to external price shocks and cross-border flows. The operations allow the central bank to influence funding conditions for banks while maintaining a presence in the foreign-exchange market without announcing outright spot interventions.

Public communication on these specific transactions has been limited, with the available details largely derived from market participants familiar with the trades. Nevertheless, the reported structure and timing of the swaps fit within the broader toolkit the central bank uses to balance liquidity management with currency market considerations.