India’s central bank has started a fresh round of foreign exchange swaps that shore up liquidity, according to people familiar with the development, as its recent currency interventions drain cash from the banking system.
Over the past week, the Reserve Bank of India has swapped dollars for rupees to inject cash, the people said, asking not to be named as they aren’t authorized to speak publicly. The swaps, which are largely of an 18-month tenure, will help offset the drain on liquidity when the RBI bought the local currency as it weakened recently, they said.
The swaps come after six months of reductions in such positions by the central bank. The authority’s net short dollar book was at $53.4 billion in August, down from a record high of $88.8 billion in February, according to Bloomberg calculations based on RBI data.
The move highlights the RBI’s effort to balance growth with currency stability as India faces the highest US tariffs in Asia. It signals the central bank’s intent to defend the rupee without starving banks of funds, which are crucial to boost consumption and blunt the impact of the the levies on the economy.
The central bank’s interventions have helped ease swings in the rupee, with a Bloomberg volatility gauge recently dropping to its lowest this year and the currency struggling to break past the 89-per-dollar mark.
A spokesperson for the central bank didn’t respond to an email seeking comment.
The swaps entail the central bank purchasing dollars from lenders against the rupee they hold while contracting to sell the greenback at a future date. When the RBI buys dollars, it injects an equivalent quantum of rupee liquidity.
The cost of locking in dollars for future delivery has eased, dropping by as much as 14 basis points this month, as the RBI’s swap deals are expected to make more dollars available down the line.
While the banking system liquidity, which slipped into a deficit toward September-end, is back into a surplus after a series of short-term cash injections, it’s much lower than this year’s high of over 4 trillion rupees ($45.1 billion) in August.
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