The Reserve Bank of India (RBI) has intensified its use of dollar-rupee buy-sell swaps to mitigate liquidity pressures within the banking system. On December 16, 2025, a USD 5 billion swap auction was conducted, followed by an announcement for a larger USD 10 billion auction set for January 13, 2026. These actions are a response to tight liquidity conditions, primarily due to advance tax payments and outflows linked to Goods and Services Tax (GST) settlements.
A dollar-rupee buy-sell swap is a foreign exchange transaction where banks exchange US dollars for rupees with the RBI, with a commitment to reverse the transaction at a specified future date. The exchange is done at a pre-agreed exchange rate and premium, providing banks with the necessary liquidity.
In the near leg of the swap, banks sell US dollars to the RBI and receive rupees in return. This transaction directly injects rupee liquidity into the banking system, enabling banks to address short-term funding needs effectively.
Upon maturity, banks repurchase the same amount of US dollars from the RBI at the fixed exchange rate plus an agreed premium. This ensures that the liquidity support offered by the RBI remains temporary, allowing for effective liquidity management.
Swaps enable the RBI to support liquidity without permanently increasing the money supply. Unlike Open Market Operations (OMOs), which alter the stock of government securities, swaps provide greater control over short- to medium-term liquidity conditions.
The USD 5 billion swap auction, which had a three-year tenor, attracted bids totaling USD 10.35 billion. This strong demand for liquidity indicates the market's acute need for financial resources. The RBI accepted USD 5.07 billion at a cut-off premium of 765 paise.
By absorbing US dollars during the near leg of the swap, the RBI reduces excess dollar supply in the foreign exchange market. This action helps to limit volatility in the rupee's exchange rate while simultaneously catering to domestic liquidity demands.
The upcoming USD 10 billion auction highlights the RBI's commitment to addressing ongoing liquidity tightness and maintaining orderly money market conditions as the new financial cycle commences.
The RBI is implementing a flexible mix of policy tools, including swaps and OMOs, to actively manage liquidity. This approach aims to ensure a smooth credit flow and maintain financial stability without altering its core monetary policy stance. Effective public finance and prudent monetary judgment depend on discipline, foresight, and respect for institutional balance.
Q1. What is a dollar-rupee buy-sell swap?
Answer: A dollar-rupee buy-sell swap is a transaction where banks exchange US dollars for rupees with the RBI, agreeing to reverse the exchange at a future date, ensuring liquidity support.
Q2. How does the swap inject liquidity into the system?
Answer: Banks sell US dollars to the RBI in the near leg, receiving rupees, which directly increases rupee liquidity in the banking system, helping meet short-term funding needs.
Q3. What happens in the far leg of the swap?
Answer: On maturity, banks buy back US dollars from the RBI at a predetermined rate, ensuring that the liquidity support is temporary and does not permanently alter the money supply.
Q4. Why is the RBI using swaps instead of relying only on OMOs?
Answer: Swaps allow the RBI to manage liquidity without permanently expanding the money supply, providing better control over short- to medium-term liquidity conditions compared to OMOs.
Q5. What did the December 2025 swap auction indicate?
Answer: The auction attracted bids worth USD 10.35 billion, reflecting strong demand for liquidity, with the RBI accepting USD 5.07 billion at a cut-off premium of 765 paise.
Question 1: What is the primary purpose of dollar-rupee swaps by the RBI?
A) To permanently increase the money supply
B) To support liquidity in the banking system
C) To stabilize the foreign exchange market
D) To reduce government spending
Correct Answer: B
Question 2: What was the cut-off premium for the December 2025 swap auction?
A) 765 paise
B) 800 paise
C) 700 paise
D) 750 paise
Correct Answer: A
Question 3: How does the RBI manage liquidity without altering the money supply?
A) By increasing taxes
B) Through dollar-rupee swaps
C) By reducing interest rates
D) By issuing government bonds
Correct Answer: B
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