RBI Likely Using Dollar-Rupee Swaps to Ease Liquidity Squeeze

As per news reports, the Reserve Bank of India utilised swaps to inject approximately $3 billion in rupee liquidity on Friday. The swaps had maturities of three, six, and twelve months. The RBI has not yet responded to an email seeking comment.

Liquidity Tightness Amid Rising Dollar Pressure

The Indian banking system is facing liquidity challenges, with the Reserve Bank of India trying to ease the pressure from a recent contraction in rupee liquidity.

This tightening is mainly due to businesses settling tax liabilities and investors borrowing funds to invest in stocks.

However, the RBI’s actions to stabilise the rupee are being hindered by its recent currency sales.

As a result, the rupee has weakened by more than 1% against the US dollar this year, marking a shift from its previous strong performance compared to other Asian currencies.

According to news reports, the Reserve Bank of India’s measures last week led to a significant drop in the dollar-rupee onshore forward implied yields, which reflect interest rate expectations and can also be influenced by currency liquidity.

On Friday, the three-month implied yield decreased by 29 basis points, while the six-month premium dropped by 21 basis points.

Liquidity Strain Triggers Surge in Call Money Rates

In the Indian money market, call money rates spiked to 7% yesterday, surpassing the RBI’s repo rate of 6.5%, indicating a liquidity crunch partly driven by the central bank’s extended dollar sales.

To ease this strain, the RBI carried out a ₹50,000 crore variable-rate repo auction to inject liquidity. Despite this intervention, worries about continued liquidity tightening and increasing yields remain.

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