RBI’s $10 Billion FX Swap Sell-off Sees Strong Demand Amid Liquidity Deficit

Aditya 4 min read

The Reserve Bank of India (RBI) conducted its largest-ever foreign exchange (FX) swap sell-off worth $10 billion, witnessing strong demand as the banking system grapples with a persistent liquidity shortage. With the rupee facing depreciation pressures, experts anticipate further liquidity-enhancing measures from the central bank, including long-term FX swaps and open market operations (OMOs).

Key Highlights of RBI’s FX Swap Auction

Auction Details:

Three-year dollar/rupee buy/sell swap conducted on March 4, 2025.
RBI received 244 bids totaling $16.23 billion.
161 bids accepted, amounting to $10.06 billion.
Marks RBI’s biggest swap sell-off on record.

Market Reaction & Rupee Impact:

The rupee depreciated by 0.4%, closing at ₹87.5125 per dollar.
Despite RBI’s interventions, the rupee remains volatile, facing pressures from global uncertainties and US-imposed tariffs.

Liquidity Shortage & Banking System Challenges:

The liquidity shortfall reached a 14-year high of ₹3.3 trillion in January 2025.
Currently, the deficit exceeds ₹1.5 trillion, causing liquidity strain in the system.
RBI is expected to maintain a liquidity shortfall between ₹1-1.5 trillion to manage inflation and currency stability.

RBI’s Strategy: Liquidity Injection Measures

RBI has actively implemented various liquidity-enhancing tools to ease the shortfall, including:

1. FX Swaps:

The March 4, 2025, auction follows a six-month swap worth $5.1 billion conducted on January 31, 2025.
These swaps involve RBI buying dollars from banks in exchange for rupees, injecting liquidity into the system, and later selling back the dollars at maturity.

2. Open Market Operations (OMO) Purchases:

Announced on January 27, 2025, to inject liquidity.
Government securities worth ₹60,000 crore were purchased in three tranches of ₹20,000 crore each.

3. Variable Rate Repo (VRR) Auctions:

Conducted a 56-day VRR auction worth ₹50,000 crore to support short-term liquidity needs.

4. Repo Rate Cut:

RBI cut the policy repo rate by 25 basis points on February 7, 2025, aiming to boost credit flow and economic activity.

Why RBI is Prioritizing Liquidity Management

Rupee Stability: Continuous forex interventions are crucial to prevent sharp depreciation of the rupee.
Global & Geopolitical Risks: The liquidity crunch is exacerbated by external factors, including geopolitical uncertainty and the threat of US tariffs.
Banking System Liquidity: With government cash surpluses running low and fiscal year-end capital requirements rising, liquidity support remains critical.

Experts Weigh In: What’s Next for RBI?

Gopal Tripathi, President & Head, Treasury & Capital Markets, Jana Small Finance Bank:

Demand for long-tenor swaps is strong, as they provide stable liquidity support.
RBI may gradually shift from short-term to long-term swaps for sustained liquidity relief.
Additional tools like OMO purchases and potential CRR (Cash Reserve Ratio) adjustments could be explored.

Senior Banking Official:

RBI may need to inject at least ₹1 trillion more through OMOs or long-term FX swaps to ease liquidity conditions.

Conclusion: Will RBI Take More Liquidity Measures?

Despite various liquidity injections, conditions remain tight. Market participants anticipate further actions such as: ✔️ Additional FX swap auctions to inject robust liquidity. ✔️ More OMO purchases to stabilize the banking system. ✔️ Potential CRR adjustments to ease liquidity constraints.

With the rupee under pressure and banking system liquidity remaining strained, RBI is likely to continue its intervention strategy. More liquidity measures are expected in the coming months to support financial stability and smooth monetary market operations.