RBI Infuses $10 Billion via Forex Swap to Ease Liquidity Shortfall Amid Rupee Depreciation

Aditya 4 min read

The Reserve Bank of India (RBI) conducted a three-year dollar-rupee buy/sell swap auction on March 1, 2025, injecting $10 billion into the financial system to address the growing liquidity shortfall in the Indian banking sector. The auction attracted 1.6 times the notified amount, highlighting strong demand for liquidity support from banks.

This move follows a $5 billion six-month swap auction in January 2025, bringing RBI’s total liquidity infusion to $47 billion in February, according to Bloomberg reports. The central bank is actively working to offset tight financial conditions and mitigate rupee depreciation pressures triggered by global market volatility.

Key Highlights of RBI’s $10 Billion Money Swap

Objective: Inject robust rupee liquidity into the system amid a 14-year-high liquidity crunch.

Auction Details:

$10 billion three-year forex swap auction conducted on March 1, 2025.
244 bids received, totaling $16.23 billion (1.6 times the notified amount).
161 bids accepted, resulting in a cutoff swap premium of 655.10 paise.

Rupee Impact:

The rupee weakened by 0.4%, closing at ₹87.5125 per dollar.
The domestic currency logged its fifth consecutive monthly decline, hitting a record low of ₹87.9 per dollar.

Why is RBI Conducting Forex Swaps?

The RBI’s aggressive liquidity management measures come amid a severe liquidity shortfall that peaked at ₹3.3 lakh crore in January 2025, its highest in 14 years. The shortage has been exacerbated by:

RBI’s forex market interventions to stabilize the rupee.
Global uncertainties, including US President Donald Trump’s tariff threats.
Tight money market conditions, affecting financial growth.

Liquidity Injection Measures by RBI

To ease the cash crunch and support the Indian banking system, RBI has implemented multiple measures, including:

1. Forex Swap Auctions

March 2025: $10 billion three-year swap auction.
January 2025: $5 billion six-month swap auction.
- These swaps involve RBI purchasing dollars from banks in exchange for rupees, injecting liquidity into the system. The banks will return rupees to the RBI after three years, along with the swap premium, to retrieve their dollars.

2. Open Market Operations (OMO) Bond Purchases

₹1 trillion ($11.5 billion) of government bond purchases in February 2025 through auction-based OMOs.

3. Long-Term Repurchase Auctions (Repo Operations)

₹1.8 trillion infused through longer-term repo auctions, set to reverse in the coming weeks.

4. Interest Rate Cuts

The RBI cut the repo rate by 25 basis points in early February 2025 to boost liquidity and stimulate credit flow.

Market Impact: INR vs USD Performance

Rupee depreciates further despite liquidity measures.
INR closed at ₹87.4950 per USD, down from ₹87.20 in the previous session.
Rupee fell 1% in February 2025, marking its fifth straight monthly decline due to foreign portfolio outflows and increased hedging in the offshore and non-deliverable forward markets.
Three-year offshore forward premium stood at 698.25 paise in the secondary market.

What’s Next? Will RBI Continue Liquidity Support?

✔️ Experts believe RBI will likely continue FX swaps and OMO purchases to ease liquidity concerns. ✔️ The liquidity crunch remains severe, requiring further interventions. ✔️ The central bank may adjust the Cash Reserve Ratio (CRR) if needed.

Conclusion: RBI’s Strategy to Stabilize Rupee and Banking System

With financial system liquidity tightening and the rupee facing persistent depreciation pressures, the RBI is expected to maintain liquidity injection measures. While the $10 billion swap auction provides temporary relief, further OMO bond purchases, FX swaps, and potential CRR adjustments might be necessary to sustain financial stability and economic growth.