India’s Central Bank Said To Ease Rupee Drought With FX Swaps

India's central bank is using dollar-rupee swaps to ease a liquidity squeeze in the country's financial system, according to people familiar with the matter.

The Reserve Bank of India used swaps to inject rupee liquidity worth around $3 billion on Friday, the people said, asking not to be named because they aren't authorized to speak publicly on the matter. The swaps had maturities of three, six and 12 months, they said. The RBI didn't immediately respond to an emailed request for comment.

The central bank was attempting to reduce the pain of a recent tightening of rupee liquidity in India, which has been fueled by a rush for the local currency as corporations settle their tax bills and investors borrow cash to buy shares.

But the RBI's recent sales of the currency complicate its efforts to support the rupee, which is under pressure from a surging dollar. The rupee has lost more than 1% of its value against the greenback so far this year, turning it from one of Asia's best-performing currencies last year into one of the region's biggest losers in 2025.

The rupee traded well past 86 per dollar on Monday, setting a new record low.

Mounting Calls

The RBI's injection of rupees into the local banking system followed mounting calls for the central bank to tackle tight liquidity conditions, with a group of large lenders informally requesting the move earlier this month. A Bloomberg gauge of liquidity among Indian banks showed a deficit of almost 2 trillion rupees ($23.1 billion) as of Jan. 12.

The central bank's efforts to support the rupee in the domestic market have contributed to the liquidity squeeze onshore, according to traders.

Late last year, the RBI cut back on its use of overseas forward contracts and concentrated its efforts on propping up the rupee at home. Its purchases helped stabilize the currency, but they also reduced the supply of rupees for firms and households.

The RBI's actions last week were reflected in a sharp decline in dollar-rupee onshore forward implied yields, which represent expectations of interest rates but can also be heavily impacted by currency liquidity. On Friday, the three-month implied yield fell 29 basis points, while the six-month premium fell 21 basis points.

The central bank is likely to be a net buyer of government bonds in the financial year from April 1, according to Goldman Sachs — something that will also help ease liquidity in the local market.

The rupee lost around 2.8% against the dollar in 2024, making it one of the best-performing currencies in Asia as the greenback surged.