RBI Conducts $5 Billion Dollar-Rupee Swap Auction

February 1, 2025

The Reserve Bank of India (RBI) recently executed a dollar-rupee buy/sell swap transaction worth $5 billion. This operation is designed to inject liquidity into the Indian financial system. It was conducted amid ongoing liquidity deficits and concerns about global market conditions. The auction attracted bids amounting to $25.6 billion, indicating strong demand. The transaction will be reversed on August 4, allowing the RBI to sell back the dollars at a forward rate.

About Dollar-Rupee Swaps

A dollar-rupee swap involves the RBI buying dollars from financial institutions in exchange for Indian rupees.
This process increases the liquidity in the banking system.
The RBI’s strategy aims to maintain stability in the foreign exchange market.
The forward rate is determined by the current spot rate plus a premium.

Recent Liquidity Trends

Liquidity in the Indian banking system has been in deficit mode since mid-December.
As of January 30, the deficit reached Rs 2.22 lakh crore, with an average daily gap of Rs 2.04 lakh crore in January.
The RBI’s recent operations, including open market operations (OMO), aim to ease this situation.

Market Reactions and Expectations

Following the RBI’s announcement, market participants adjusted their positions accordingly.
The rupee depreciated to 86.53 against the dollar, influenced by global risk sentiment and uncertainties in US trade policies.
Forward premiums on USD/INR contracts also fell, reflecting market adjustments to expected liquidity impacts.

Bond Market Dynamics

The bond market displayed mixed reactions.
The 10-year benchmark bond yield initially softened but later regained its levels due to state-owned banks selling bonds for profit.
The yield ended slightly higher, indicating cautious market sentiment.
Analysts predict that yields will remain within a tight range until the Union Budget announcement.

Future RBI Operations

The RBI plans to conduct further OMO auctions totalling Rs 60,000 crore in the coming weeks. These operations are intended to manage liquidity effectively. Additionally, a variable rate repo auction is scheduled, which will further influence market liquidity.

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