RBI Conducts USD/INR Sell-Buy Swaps to Drain Excess Liquidity, Lifting 1-Year Forward Implied Yield to 3.16%

The Reserve Bank of India (RBI) intervened in the foreign exchange market by conducting near-maturity USD/INR sell-buy swaps to drain surplus rupee liquidity from the domestic banking system. Market participants and currency dealers reported that the central bank undertook swaps for September and October maturities.

Traders estimated that the RBI carried out swap volumes of between $700 million and $1 billion across the two maturities. The intervention quickly altered pricing in the forward currency market, lifting forward premiums across maturities and pushing the 1-year dollar-rupee forward implied yield up by 11 basis points to a three-month peak of 3.16%.

Mechanics of the Sell-Buy Swap

In a sell-buy swap, the RBI sells US dollars to banks at the spot rate and receives Indian rupees in the first leg of the transaction, effectively taking rupee liquidity out of the banking system immediately. In the second leg, the transaction reverses on the specified maturity date (September or October), when the RBI buys back dollars and releases rupees.

By soaking up short-term rupee funds, the central bank created upward pressure on near-term cash-dollar swap points:

• September forward premiums advanced by roughly 2.5 paise following the intervention.
• October forward premiums climbed by around 4 paise.
• The 1-year forward implied yield jumped 11 basis points to touch 3.16%.

Massive Liquidity Surplus in the Banking System

The central bank's recourse to currency swaps followed a massive liquidity glut in the Indian banking system. Indian lenders accumulated approximately $127 billion to $128 billion in foreign currency and non-resident Indian (NRI) deposits under dedicated schemes. A large portion of these dollar inflows was swapped directly with the RBI for rupees, leaving banks flush with local currency.

Gaura Sen Gupta, chief economist at IDFC FIRST Bank, estimated that the banking sector's core liquidity surplus had peaked in the range of ₹14 trillion to ₹15 trillion ($147.26 billion to $157.78 billion).

To manage this cash overhang, the RBI initially deployed conventional liquidity-absorption mechanisms, but a 30-day variable-rate reverse repo (VRRR) auction earlier in the week witnessed muted bank participation. Following meetings between commercial banks and the central bank, lenders suggested foreign exchange sell-buy swaps as an alternative mechanism to withdraw rupees without destabilizing domestic bond markets or compressing banking margins.

Impact on Importers, Exporters, and the Rupee

The intervention comes as the Indian rupee navigates pressure from elevated global crude oil prices, with Brent oil crossing $100 per barrel following geopolitical escalations in the Middle East. The rupee was trading around 95.1050 per US dollar as the central bank countered headwinds with a combination of spot dollar sales and swap operations.

The sudden jump in forward premiums has direct implications for Indian businesses managing currency exposure:

Hedging Costs and Incentives:

• Exporters: Higher forward premia increase the hedging incentive for exporters, as locking in forward contracts provides higher rupee realizations against forward dollar receivables.
• Importers: Companies with near-term dollar liabilities face steeper forward hedging costs, forcing treasurers to reassess outright forward coverage versus options-based structures.
• RBI Balance Sheet: Conducting near-dated sell-buy swaps also helps the central bank manage and smooth out its sizeable forward dollar book, where billions in forward liabilities mature over the coming year.

Market analysts expect the RBI to continue deploying a measured mix of liquidity tools—including further sell-buy swaps and short-tenor operations—to gradually absorb excess cash while keeping foreign exchange volatility in check.

Tags: Reserve Bank of India USDINR Forex Markets Indian Rupee IDFC FIRST Bank