RBI to Infuse Liquidity via $10 bn USD-INR Swap Deal

A currency swap is a financial contract where two parties exchange principal and interest payments in different currencies. Learn how currency swaps work and their key benefits.

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Context: The Reserve Bank of India (RBI) has announced a long-term USD-INR Buy/Sell swap auction to meet the durable liquidity needs of the financial system.

What is a Currency Swap?

A currency swap is a financial contract where two parties exchange one currency for another and agree to reverse the transaction at a future date at a pre-agreed exchange rate.

Purpose of RBI’s USD-INR Buy/Sell Swap

Manages liquidity without affecting interest rates.
Helps stabilize the Indian Rupee (INR) during periods of capital outflows.
Supports foreign exchange reserves and reduces speculative pressures.

Types of Currency Swaps

Buy/Sell Swap (Liquidity Injection by RBI)

First leg (Buy Leg): RBI buys USD from banks and gives them Rupees.
Second leg (Sell Leg, after tenor ends): RBI sells USD back and takes back Rupees at a pre-agreed exchange rate.
Objective: To increase rupee liquidity in the banking system.

Sell/Buy Swap (Liquidity Absorption by RBI)

First leg (Sell Leg): RBI sells USD and takes Rupees from banks.
Second leg (Buy Leg, after tenor ends): RBI buys back USD and returns Rupees.
Objective: To absorb excess rupee liquidity and control inflation.