The Reserve Bank of India (RBI) has announced a $10 billion foreign exchange (forex) swap to inject liquidity into the banking system and address the prevailing cash crunch. The three-year swap auction is scheduled for February 28, 2025. This action follows a $5 billion forex swap from last month, demonstrating the central bank’s commitment to ensuring liquidity stability. The banking sector is grappling with one of the worst liquidity shortages in more than a decade, partly due to the RBI’s proactive dollar sales aimed at shielding the rupee from volatility.
About the Forex Swap
• The RBI will buy US dollars from banks in exchange for rupees, with a promise to sell the dollars back at a later date.
• This swap will inject rupee liquidity into the banking system, which will help alleviate the liquidity shortfall.
• This is the second forex swap in a short period, following a $5 billion injection through a six-month swap in January.
• This action is anticipated to lower short-term interest rates.
Reason for the Liquidity Crunch
- India’s banking system is facing a liquidity deficit of approximately ₹2 trillion.
- March, being the fiscal year-end, is traditionally a difficult period for banks due to increased demand for liquidity.
- RBI’s dollar sales to protect the rupee from volatility, partly due to US President Donald Trump’s tariff policies, have contributed to the cash crunch.
