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The Reserve Bank of India’s (RBI) recent decision to inject an additional $10 billion into the financial system through a dollar/rupee swap auction is a timely measure aimed at addressing long-term liquidity concerns among domestic lenders. These concerns stem from a flight of foreign capital from Indian stock markets, as investors seek better returns in the United States amid President Donald Trump’s proposed corporate tax cuts and ongoing tariff wars, which have strengthened the U.S. dollar against global currencies. This marks the second such rupee infusion in less than a month. However, unlike the first tranche of $5 billion on January 31, which had a six-month tenor, the latest swap auction has a three-year duration. The combined effect of these two auctions will inject approximately ₹1.3 trillion into the banking system, as lenders deposit their dollar reserves with the RBI in exchange for rupees at a pre-determined buyback premium. Currency swaps are among the tools central banks deploy during periods of high volatility in the global financial system. These measures have the primary aim of stabilising the local currency, mitigating liquidity constraints in the domestic financial system, and curbing inflationary pressures. Economists estimate that an additional $5 billion infusion may be necessary to neutralise the ₹1.7 trillion liquidity deficit in India’s banking system as of February 20, 2025.
This is the second time that the RBI has conducted a long-duration currency swap. The first was in 2019, in response to global financial volatility during Mr. Trump’s first term, amid trade tariff tensions and tax cuts. However, unlike 2019, when India’s foreign exchange reserves were rising, ensuring dollar availability while rupee liquidity remained constrained, today’s situation is more challenging. Between October 2024 and February 21, 2025, the rupee has depreciated approximately 3.3% against the dollar, breaching the 85 per dollar mark on December 19, 2024. Foreign portfolio investors and foreign institutional investors have also withdrawn roughly $31 billion from Indian equity markets. Since December 2024, the RBI has sold an estimated $111.2 billion (about 18% of its foreign exchange reserves) to stabilise the rupee. Given these conditions, the latest long-term currency swap appears to be a necessity rather than a proactive measure. Indian banks must capitalise on this liquidity infusion by continuing to extend credit, ensuring that the cycle of capital investment, employment generation, wage growth, and consumer demand remains intact. This, in turn, could help propel India’s real GDP growth beyond the current 6.4%, despite prevailing global economic headwinds.
Published – February 24, 2025 12:20 am IST
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Necessary infusion: on the RBI’s currency swap
