The Reserve Bank of India (RBI) will conduct its largest-ever $10-billion dollar/rupee buy-sell swap auction on February 28, aiming to address the persistent liquidity deficit in the banking system. Â
Under the swap arrangement, the central bank will purchase dollars for immediate delivery and sell them for delivery after three years. The first leg of the transaction will be settled on March 4, with the swap reversing on March 6, 2028. Â
This marks the second such auction by the RBI in less than a month, following a $5.1-billion swap on January 31 for a six-month tenure. The latest move signals a continued effort to inject durable liquidity, with banking system deficits persisting since mid-December. Â
Market participants will bid based on the premium they are willing to pay to the RBI, quoted in paisa terms to two decimal places. The auction will run from 10:30 am to 11:30 am, with results announced the same day. The minimum bid size is $10 million, and bids must be in multiples of $1 million. Â
The RBI’s previous $5-billion auction on January 31 is set to reverse on August 4. The central bank has also taken additional measures to boost liquidity, including cutting its key interest rate for the first time in nearly five years earlier this month. However, market participants stress that sustained liquidity is essential for effective policy transmission by lenders. Â
Beyond forex swaps, the RBI has infused over Rs 3.6 lakh crore ($41.56 billion) of durable liquidity through debt purchases, foreign exchange interventions, and long-duration repos. As of February 20, India’s banking system faced a liquidity shortfall of around Rs 1.7 lakh crore. The central bank has further injected Rs 1.83 lakh crore via long-term repos set to mature in early April. Â
With the financial system grappling with tight liquidity conditions, the upcoming swap auction is set to be a key test of market appetite and the RBI’s ongoing liquidity management strategy.
(With inputs from agencies)