The Reserve Bank of India has conducted currency swaps worth at least $10 billion in recent weeks to reduce liquidity in the financial system, according to people familiar with the developments. As reported by Mint and CNBC TV18, the RBI carried out sell-buy swaps with lenders over the past two weeks, including deals with maturities ranging from one month to about six months. In such transactions, the RBI sells dollars to banks in exchange for rupees, agreeing to reverse the deal at a later date. By taking rupees from banks, these swaps drain rupee liquidity from the system. Rates on dollar-rupee contracts maturing in three months to six months have climbed this month, reflecting the central bank's activity, according to sources familiar with the matter. The swaps have extended their rise on Thursday, with the six-month and one-year rates climbing about 20 basis points to their highest since May, as per CNBC TV18. The RBI's recent swaps are larger than similar steps that have been publicly announced over the past few years, largely reflecting the scale of the cash surplus that the central bank is currently tackling. Typically, the RBI carries out public swap auctions in tranches of around $3 billion to $5 billion, making these operations significantly larger in scale.
The Reserve Bank of India successfully absorbed ₹75,026 crore from the banking system through an overnight variable rate reverse repo (VRRR) auction on Wednesday. According to the RBI official release, the central bank received bids worth ₹87,993 crore for a notified amount of ₹75,000 crore, but accepted only the full amount of ₹75,026 crore. The bids were accepted at a cut-off and weighted average rate of 5.24 per cent. The overnight facility had a tenor of one day, with the VRRR rate serving as the rate at which banks park their funds with the RBI, a tool central banks use to suck liquidity from the system. A spokesperson for RBI did not respond to an email seeking comment on the recent operations.
The RBI has significantly intensified its liquidity management efforts beyond traditional swap operations. As per Business Standard, the central bank has conducted open market operations (OMO) sales of government securities worth ₹50,000 crore on September 17th and ₹25,000 crore on September 21st, with the remaining ₹25,000 crore tranche scheduled for September 28th. The RBI had announced total OMO sales of one trillion rupees in three tranches to manage liquidity conditions. The central bank has also been conducting VRRR auctions to absorb excess liquidity and align overnight money market rates with the repo rate. According to CNBC TV18, the central bank may have carried out around $10 billion to $15 billion of sell-buy swaps maturing within the fiscal year ending March 31, demonstrating the scale of ongoing liquidity management operations.
Lenders have been awash with cash after the RBI's measures to attract foreign capital raked in more than $140 billion, far exceeding official expectations. The inflows pushed surplus banking liquidity to a record ₹11 lakh crore ($115 billion) earlier this month, pushing down borrowing costs and worsening inflation risks from high oil prices. According to RBI data, currently, liquidity in the banking system is estimated to be in surplus of around ₹4.45 lakh crore as of September 22. Keeping in mind that excess liquidity can be inflationary, the RBI has been absorbing excess liquidity from the system, especially after the overwhelming response from the special deposit scheme for NRIs filling up RBI's coffers with $133 billion. As per CNBC TV18, Gaura Sen Gupta, chief economist at IDFC First Bank Ltd, noted that "The RBI has been managing the liquidity build-up using bond sales and sell-buy swaps. Without these tools, the surplus would have peaked at 15.5 trillion rupees."
Besides FCNR(B) inflows, month-end government expenditure, including payments toward salaries and pensions, also added to liquidity in the banking system. According to the RBI data, the ongoing liquidity management operations reflect efforts to maintain optimal conditions in the money market while ensuring monetary policy transmission remains effective. The VRRR auction received offers for 96% of the amount for the rate of 5.24%, demonstrating strong market participation in the liquidity absorption process. Analysts noted that liquidity in the banking system has been boosted by substantial mobilisation of Foreign Currency Non-Resident (Bank) deposits by banks, with the inflows bringing foreign currency into the system while subsequent swaps with the RBI injected rupee liquidity into banks.
