RBI’s Dollar–Rupee Swap Explained: What It Means And Why It Matters

The Reserve Bank of India (RBI) conducted $5-billion dollar–rupee buy–sell swap with a three-year tenure on Tuesday, a move that has drawn attention amid renewed pressure on the rupee.

While the terminology may sound complex, the transaction is best understood as a temporary exchange of dollars and rupees between the RBI and banks, designed primarily to inject liquidity into the system rather than directly defend the currency.

Deepak Shenoy the Chief Executive Officer, Capitalmind AMC in a post on X summed up the move in characteristically simple terms, describing it as the RBI effectively telling banks: take rupees today, give me dollars now, and three years later we reverse the deal — but at a price.

The RBI had earlier announced during the monetary policy meeting that it would conduct a $5-billion buy–sell swap with a three-year tenure, which it followed through on Tuesday. At maturity, banks will return the rupees and receive their dollars back.

This makes the increase in forex reserves temporary, not permanent.

However, as Shenoy pointed there is a premium, which is the extra rupees banks must pay when the swap is reversed after three years.

In this case, the premium is Rs 7.77 per dollar.

With the current USD/INR reference rate at Rs 91.02, this means that after three years, Banks will pay Rs 98.79 to get back one dollar.

This premium reflects the market’s expectation that the rupee will weaken over time. Spread over three years, it implies an annual rupee depreciation of about 2.8%.

For banks, this swap is effectively a rupee borrowing arrangement.

Banks give dollars to the RBI today and receive rupees, which they can use for lending or funding operations. After three years, they repay rupees at a known cost and get their dollars back.

Given that three-year dollar funding costs in the US are around 4%, and the implied rupee depreciation is about 2.8%, the effective cost of rupee funding for banks comes to roughly 7%. This is a reasonable cost, making the swap attractive for banks.

The swap provides protection to banks against extreme currency moves, which becomes an important aspect in current times when the Indian currency has been growing weaker.

Even if the rupee depreciates sharply to, say, Rs 110 per dollar in three years, banks will still be able to get their dollars back at the pre-agreed rate of Rs 98.79. The exchange rate risk is largely capped.

According to Shenoy, not in the short term.

By buying dollars today, the RBI is actually adding mild pressure on the rupee rather than supporting it. If the RBI wanted to directly stabilise the currency, it would need to sell dollars in the spot market, which it has not done.

The swap improves RBI’s forex reserves on paper, but it is a temporary increase, the dollars will need to be returned after three years.

The RBI is trying to manage liquidity and growth without aggressively intervening in currency markets.

Long-term dollar-rupee buy/sell swaps could also reduce the chances of open market operations for the next two weeks at least, which could impact the long-term bonds and contribute to a mild steepening in the yield curve, market participants said.

This move has come as the central bank has been trying to infuse durable and transient liquidity in the banking system by market intervention tools such as conducting OMO purchases, longer-term and short-term variable rate repo auctions and dollar-rupee buy/sell swaps.

The primary pressure on the rupee currently comes from foreign portfolio investor (FPI) outflows, not from India’s trade deficit or current account position, noted Shenoy.

FPIs have sold over Rs 25,000 crore, or roughly $3 billion, in December alone across equity and debt markets. When foreign investors exit Indian assets, they take dollars out of the country, weakening the rupee.

Unless these outflows slow meaningfully or the RBI starts selling dollars aggressively, sustained stability in USD/INR looks unlikely.

"FPI flows, RBI spot intervention and changes in RBI forward positions are individually significant, but no single factor explains more than 13–14% of rupee variation, highlighting the role of non-economic and sentiment-driven factors," Bank of Baroda said in a note.