India's Central Bank Uses Currency Swap to Absorb Excess Liquidity
MacroDigital Finance
The Reserve Bank of India (RBI) has used currency swap transactions to absorb liquidity from the banking system, after excess cash levels surged to a record high of around 11 trillion rupees, or approximately 115 billion dollars. The RBI conducted short-term sell-buy foreign exchange swaps, some of which will mature in October. Under these transactions, the RBI sells dollars to banks in exchange for rupees and agrees to buy them back later, thereby temporarily draining rupee liquidity. This move has led to an increase in the three-month dollar-rupee forward rate by 17 basis points to 2.97%, and the six-month rate by 11 basis points. The large excess liquidity has reduced banks' funding costs and could stimulate credit demand and add to inflationary pressures. Investors are watching whether the RBI will take additional measures to manage the excess cash. The use of currency swaps reflects an effort to manage liquidity without relying solely on interest rate adjustments.
