RBI to Inject $10 Billion Through Forex Swap to Ease Liquidity Crunch

The Reserve Bank of India (RBI) has announced a $10 billion foreign exchange (forex) swap to inject liquidity into the banking system and address the prevailing cash crunch. The three-year swap auction is scheduled for February 28, 2025. This move follows a previous $5 billion forex swap last month, highlighting the central bank’s commitment to stabilizing liquidity. The banking sector has been facing one of the worst liquidity shortfalls in over a decade, partly due to RBI’s aggressive dollar sales to shield the rupee from volatility.

Key Highlights

About the Forex Swap

• RBI will purchase US dollars from banks in exchange for rupees while committing to sell the dollars at a future date.
• The swap will add rupee liquidity into the banking system, helping to ease the liquidity deficit.
• This marks the second forex swap in recent weeks, following a $5 billion injection via a six-month swap in January.
• The move is expected to bring down short-term interest rates.

Reason for the Liquidity Crunch

• India’s banking system is facing a liquidity deficit of approximately ₹2 trillion.
• March, being the fiscal year-end, is traditionally a difficult period for banks due to increased demand for liquidity.
• RBI’s dollar sales to protect the rupee from volatility, partly due to US President Donald Trump’s tariff policies, have contributed to the cash crunch.

Other Measures Taken by RBI

In addition to the forex swap, RBI has been deploying,

• Open market bond purchases to inject liquidity.
• Longer-term variable repo auctions to manage liquidity supply.
• Interest rate cuts (earlier this month, for the first time in nearly five years) to stimulate the economy.
• Despite these efforts, analysts believe further liquidity infusion is needed to ensure monetary policy measures are effective.

Market Reactions & Expert Opinions

• Traders expect the liquidity injection to ease short-term rates and provide relief to banks.
• Debendra Dash, a trader at AU Small Finance Bank Ltd., stated that RBI’s move will help manage the fiscal year-end liquidity stress.