RBI's $10 Billion FX Swap: Impact on Rupee Liquidity and Bond Markets

RBI's $10 Billion FX Swap: Impact on Rupee Liquidity and Bond Markets

February 23, 2025
Ayzalme

The Reserve Bank of India (RBI) has taken a significant step to boost rupee liquidity by announcing a $10 billion three-year foreign exchange (FX) swap. This move, set to be conducted on Friday, is expected to inject approximately 870 billion rupees into the banking system, alleviating ongoing cash shortages and influencing financial markets. 💸

Why is the RBI Conducting an FX Swap?

India’s banking system has been experiencing a persistent liquidity deficit, prompting the central bank to intervene. The RBI has already infused over 3.6 trillion rupees into the financial system through:

📈 Open market and secondary market bond purchases
🔁 A six-month FX swap
💰 Repos maturing in early April

The latest $10 billion buy/sell swap is another attempt to ensure smoother liquidity conditions, particularly as the fiscal year-end approaches.

Market Reactions: Currency and Bond Market Impact

1. Drop in Forward Premiums

The one-year dollar/rupee forward premium saw a sharp decline of 12 basis points to 1.99%, reaching its lowest level since December. This is a significant development because lower forward premiums reduce hedging costs for companies, making future dollar transactions more affordable.

2. Mixed Reactions in Bond Markets

📉 The benchmark 10-year bond yield remained largely unchanged, reflecting investor caution.
📉 Yields on shorter-term four-to-five-year government bonds dropped by 2 basis points, benefiting corporates and NBFCs that rely on short-term borrowing.
📉 The one-year overnight index swap (OIS) rate also declined, reaching a 30-month low, signaling improved market confidence in liquidity conditions.

Will the RBI Need Further Action?

Despite this liquidity boost, some analysts believe additional measures may be required.

📊 CSB Bank's Treasury Head, Alok Singh, suggests the RBI may need to conduct open market purchases of up to 1 trillion rupees to maintain liquidity balance by the end of the financial year.
📈 Citi’s Chief India Economist, Samiran Chakraborty, predicts a 300-500 billion rupee liquidity deficit could persist, potentially leading to further RBI interventions in March ranging between 500 billion to 1 trillion rupees.

What This Means for India's Economy

The RBI’s proactive liquidity management is crucial for:

✅ Maintaining financial stability as the fiscal year-end approaches.
✅ Ensuring borrowing costs remain manageable for businesses and banks.
✅ Supporting the rupee by preventing excessive currency volatility.

Key Takeaways for Traders and Investors

💡 RBI’s FX swap injects 870 billion INR into the system, helping ease liquidity pressures.
💼 Bond market reactions were mixed but short-term yields improved.
🧠 More interventions may follow as analysts expect a continued liquidity deficit.
📅 Fiscal year-end strategies will be key to RBI’s next move.

With major economic targets ahead, the RBI's FX swap is not only a tactical move to ease current pressures—it’s also a strategic signal of its commitment to keeping India’s financial system stable and growth-ready. 🔍

Ayzalme

Just a calm man, enthusiast for investing and technology.