The Reserve Bank of India's USD/INR buy/sell swap auction on Tuesday received robust responses with nearly double subscriptions than the notified amount. According to The Economic Times, the central bank received bids worth $9.80 billion, but accepted just $5 billion for a cut-off premium of 910 paise. The auction received 254 bids and accepted 144 bids, with the bid-to-cover ratio standing at 1.96. The cut-off premium represents an increase of 182 paise from the last time the central bank conducted a 3-year swap, indicating strengthening demand for dollar-rupee hedging instruments. The auction will have an initial leg on Friday, with the second leg, which is a reversal of funds, scheduled for May 29, 2029. In the first leg of the transaction, banks will sell US dollars to the Reserve Bank at the FBIL reference rate of the auction date, with settlement taking place on-spot basis. The settlement of the initial leg will inject rupee liquidity into the banking system, which currently stands at a low surplus of ₹67,285 crores as of May 25.
The Reserve Bank of India has transferred ₹2.87 lakh crore to the government as surplus, marking the largest such transfer in RBI history. According to Economic Times, this represents a 7% increase from the previous year's transfer of ₹1.76 lakh crore, which was ₹1.09 lakh crore after risk provisions. The transfer is part of the RBI's economic capital framework, which allows the central bank to maintain a contingent risk buffer between 4.5% and 7.5% of its balance sheet. In FY26, the Contingent Risk Buffer was reduced from 7.5% to 6.5% of the balance sheet, which significantly impacted the transfer amount - a one-percentage-point change on a balance sheet of ₹91.97 lakh crore translates to approximately ₹91,971 crore. The RBI's balance sheet stood at ₹91.97 lakh crore as of March 31, 2026, representing a 20.61% increase from the previous year. As per Economic Times, this year's ₹2.87 lakh crore figure exceeds market expectations, which ranged between ₹2.8 lakh crore and ₹3.5 lakh crore.
Despite the record RBI transfer, the government faces significant fiscal headwinds from rising oil prices and supply chain disruptions. As reported by Business Standard, state-run oil marketing companies were facing underrecoveries worth ₹1,000 crore per day until recently, though three increases in petrol and diesel prices have helped reduce these losses. The government has reduced special additional excise duty on petrol and diesel, potentially leading to an annual revenue loss of about ₹1.5 trillion. Additionally, tax collection is expected to suffer due to supply-chain disruption and lower production, while the government has budgeted to contain the fiscal deficit at 4.3% of GDP. The government's total budget estimate for dividend/surplus from RBI and nationalised financial institutions stands at ₹3.16 trillion. According to Economic Times, with geopolitical tensions in West Asia pushing up oil and fertiliser prices, the Modi government will need every rupee it can secure to manage rising subsidy bills while staying committed to fiscal consolidation.
Kanika Pasricha, Chief Economic Advisor at Union Bank of India, described the RBI transfer as providing only a slight fiscal buffer for the government, while cautioning that fiscal pressures are building on multiple fronts. As reported by Economic Times, excise duty cuts on fuel of approximately ₹10 per litre are set to dent central revenues, and geopolitical risk and ongoing global tensions could weigh on nominal GDP growth and compress tax collection numbers. Pasricha noted that inflation risks are increasing due to higher fuel prices, with even assuming $90 per barrel for the current financial year, the inflation number is tracking close to 5%. She highlighted that core Wholesale Price Index (WPI) inflation has spiked to 8.3%, which she expects will gradually feed into core Consumer Price Index (CPI) readings, a risk that warrants close monitoring as the MPC meets next week. According to Economic Times, Pasricha explained that the pace of pass-through into CPI has been slightly more subdued, pegging the current CPI inflation at 4.2-4.3% rather than the previously assumed 4.5%.
The RBI conducted a ₹9.10 premium FX swap auction on Tuesday, attracting nearly $10 billion in bids - almost twice the auction size. As reported by The Economic Times, the central bank accepted 141 bids at the three-year dollar/rupee buy-sell swap, with the premium cut-off set at ₹9.10. The auction came as the rupee continues to face pressure, having fallen to consecutive record lows, including an all-time low of 96.96 per dollar last week before recovering to about 95.50 on central bank interventions and retreating oil prices. Currently, the liquidity in the banking system is estimated to be in surplus of around ₹67,285.42 crore as on May 25, as per the RBI's data. The swap will inject rupee liquidity back into the banking system through settlement of the initial leg, scheduled for Friday, and will be reversed three years later.
The Reserve Bank of India's Monetary Policy Committee is expected to maintain status quo in its upcoming June meeting, according to Business Standard poll respondents. Retail inflation rose to 3.48% in April from 3.40% in March, driven by higher food prices, but remains within the RBI's tolerance band of 2-6%. As per HDFC Bank's Sakshi Gupta, "Inflation is below the RBI's median target. The West Asia conflict can have growth implications as well. So, wait-and-watch mode is currently expected from the RBI." However, most respondents anticipate one to three rate hikes during the current financial year, with Standard Chartered Bank expecting 50 basis points of hikes in FY27 as upside risks to inflation from higher commodity prices and currency pressures outweigh growth concerns. The rupee has depreciated over 10% in the last one year, adding to inflationary pressures.
The RBI's growth forecast for FY27 remains at 6.9% real GDP growth, with respondents divided on whether the central bank will revise this projection in the June policy review. According to IDFC First Bank's Gaura Sen Gupta, "No revision in growth forecast as high frequency indicators have held-up. Consumer was protected with rise in fuel prices only starting in May. Listed companies' performance in Q4FY26 showed that margins have held-up as rise in input costs balanced by low interest costs and drawdown of inventories." However, a majority of respondents expect an upward revision in inflation forecast for FY27, particularly if the Strait of Hormuz remains closed, as the RBI's 4.6% inflation projection is based on crude oil prices averaging $85 per barrel. The central bank's flexible inflation targeting framework provides room to look through supply-side shocks as long as inflation remains below the upper tolerance threshold of 6%.
