The move highlights the RBI’s effort to balance growth with currency stability as India faces the highest US tariffs in Asia
[MUMBAI] India’s central bank has started a fresh round of foreign exchange swaps that shore up liquidity, according to sources familiar with the development, as its recent currency interventions drain cash from the banking system.
Over the past week, the Reserve Bank of India (RBI) has swapped US dollars for rupees to inject cash, the sources said, asking not to be named as they are not authorised to speak publicly. The swaps, which are largely of an 18-month tenure, will help offset the drain on liquidity when the RBI bought the local currency as it weakened recently, they said.
The swaps come after six months of reductions in such positions by the central bank. The authority’s net short US dollar book was at US$53.4 billion in August, down from a record high of US$88.8 billion in February, according to Bloomberg calculations based on RBI data.
The move highlights the RBI’s effort to balance growth with currency stability as India faces the highest US tariffs in Asia. It signals the central bank’s intent to defend the rupee without starving banks of funds, which are crucial to boost consumption and blunt the impact of the the levies on the economy.
The central bank’s interventions have helped ease swings in the rupee, with a Bloomberg volatility gauge recently dropping to its lowest this year and the currency struggling to break past the 89 per US dollar mark.
A spokesperson for the central bank did not respond to an e-mail seeking comment.
The swaps entail the central bank purchasing US dollars from lenders against the rupee they hold while contracting to sell the greenback at a future date. When the RBI buys US dollars, it injects an equivalent quantum of rupee liquidity.
The cost of locking in US dollars for future delivery has eased, dropping by as much as 14 basis points this month, as the RBI’s swap deals are expected to make more US dollars available down the line.
While the banking system liquidity, which slipped into a deficit towards September-end, is back into a surplus after a series of short-term cash injections, it’s much lower than this year’s high of over four trillion rupees (S$59 billion) in August. BLOOMBERG
