RBI Unleashes $10 Billion in Currency Swaps to Tame Surplus Liquidity

The Reserve Bank of India (RBI) has been busy managing the country's currency supply to mitigate inflation risks from surplus liquidity. To achieve this, the central bank has conducted large-scale currency swaps worth at least $10 billion over the past two weeks.

According to people familiar with the matter, the RBI sold dollars to banks in exchange for rupees through a process called sell-buy swaps. These transactions involve the RBI selling dollars to banks and agreeing to reverse the deal at a later date. By taking rupees from banks, the swaps drain rupee liquidity from the system.

The RBI's recent swaps are significantly larger than similar steps taken in previous years, reflecting the scale of the cash surplus that the central bank is tackling. The record surplus banking liquidity has pushed down borrowing costs and worsened inflation risks from high oil prices.

Gaura Sen Gupta, chief economist at IDFC First Bank Ltd., believes that without these tools, the surplus would have peaked at ₹15.5 trillion. She estimates that the RBI may have carried out around $10 billion to $15 billion of sell-buy swaps maturing within the fiscal year ending March 31.