RBI likely deploys FX swaps to mop up overseas deposit-driven liquidity, traders say
The central bank is conducting the swaps with a maturity in September, four bankers and two FX brokers
The Reserve Bank of India (RBI) may utilize foreign exchange (FX) swaps to address surplus rupee liquidity generated by lenders through overseas deposits, according to bankers. These swaps, which have a maturity in September and potentially October, involve the RBI selling dollars at the spot rate to obtain rupees, effectively removing liquidity from the banking system.
The transaction is reversed at maturity, either in September or October. The central bank has reportedly conducted swaps worth around $700 million across these two maturities. This move follows the RBI's recent 30-day variable-rate reverse repo (VRRR) operation, which received a weak response. The banking system is currently saturated with rupee liquidity due to a surge in dollar deposits from non-resident Indians, which were swapped with the RBI at zero cost.
Gaura Sen Gupta, chief economist at IDFC FIRST Bank, estimates that core liquidity surplus has reached 14 trillion to 15 trillion rupees ($147.26 billion-$157.78 billion). The RBI aims to drain about ₹7 trillion through VRRR operations and other instruments, with FX swaps likely to be among the preferred options. Indian lenders proposed using FX sell-buy swaps for liquidity management at a recent meeting with the RBI.
The move comes as the RBI seeks to manage the liquidity overhang and potentially trim its FX forward book liabilities. At the end of July, the central bank's net forward dollar liabilities stood at approximately $137 billion, with $47.6 billion in the up to one-year bucket.
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