Informist, Tuesday, Jul. 29, 2025

By Pratiksha

NEW DELHI – The Reserve Bank of India has strong reasons to give delivery of $5 billion on its dollar/rupee buy-sell swaps maturing on Aug. 4, given the ample rupee liquidity in the banking system, foreign exchange market dealers said.

Under a buy-sell swap, an entity buys dollars in the spot market and simultaneously agrees to sell the same amount of dollars at the end of the swap period. In January, the central bank undertook the $5-billion swap with the stated aim of injecting rupee liquidity into the banking system. Now that these swaps are coming up for maturity, the RBI has two choices – either give delivery of the dollars or roll the swap over by conducting a fresh swap. According to dealers, prevailing market conditions support the former.

The RBI giving delivery of the forward dollars it sold as a part of the swap would entail the central bank infusing $5 billion into the financial system while simultaneously taking out around INR 430 odd billion of rupee liquidity, at the current exchange rate.

"Given the current rupee liquidity in the system and the uptick expected in September, RBI appears well-positioned to let the swap mature naturally," Nitin Agarwal, head of trading at ANZ Bank India, said. "RBI has anyway pre-empted through CRR (Cash Reserve Ratio) cuts, suggesting that additional intervention may not be necessary at this stage."

On Monday, the net liquidity absorbed by the RBI--a proxy for the systemic liquidity surplus--was INR 2.24 trillion. From a deficit of around INR 3.2 trillion in late January, liquidity rose to a surplus of over INR 4.2 trillion by early July, largely on the back of durable liquidity injections. The RBI has conducted three buy-sell swaps worth $25 billion and bought gilts at open market operations, while the government has bought back gilts as well – all to infuse rupee liquidity into the system.

Liquidity in the system is expected to remain comfortable owing to the central bank's bumper liquidity infusion in the form of a 100-basis-point cut in the Cash Reserve Ratio, which will be carried out in four equal tranches of 25 bps each with effect from the fortnights beginning Sept. 6, Oct. 4, Nov. 1 and Nov. 29. The CRR reduction is expected to infuse liquidity to the tune of INR 2.5 trillion into the banking system by December.

"Going ahead, we expect liquidity surplus to widen to over INR 4 trillion towards the end of this week, driven by month-end government spending and buyback of government securities (INR 300 billion)," Kotak Mahindra Bank said in a note. "We continue to see durable liquidity in the INR 5.5 to INR 6 trillion range this quarter."

Moreover, the central bank parting with $5 billion is unlikely to make much of a dent in its foreign exchange reserves, which have been hovering near the $700-billion mark. India's foreign exchange reserves were at $695.49 billion as of Jul. 18, not too far from its all-time high of $704.89 billion.

If the central bank gives delivery of the swap, the premium on near-term forward tenures may see an immediate boost due to a temporary dollar surplus in the system and the one-year dollar/rupee forward premium may rise to 2.15-2.20%, dealers said. However, if the central bank does not give delivery of the swap, the one-year dollar/rupee forward premium may continue to trade in the 1.95-2.05?nd. At 1040 IST, the one-year dollar/rupee forward premium was at 2.07%.

"The RBI is expected to deliver dollars from the dollar/rupee swap, with rupee and dollar system liquidity remaining comfortable. Overnight FX swap rates are expected to rise for a few days due to surplus dollar liquidity arising from the above, and on account of IPO inflows," Sameer Karyatt, executive director and head of trading at DBS Bank India, said. "Forward rates are also expected to rise during this period before reverting to current levels."

While most traders have priced in the swap delivery, a rollover would further confuse the market on what the RBI considers a comfortable level for rupee liquidity. That would be another reason for the RBI to just let the swaps mature into delivery. End

US$1 = INR 86.87

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Avishek Dutta

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