In the past few months—November, December, and January—the RBI intervened in the currency market but did not directly sell dollars. Instead, they used a buy/sell swap mechanism, meaning they first sold dollars and later did a buy/sell. Now, some of those earlier transactions are maturing, and RBI needs to deliver the dollars. To manage this, they are extending some obligations.
On February 28, the RBI conducted a similar $10 billion buy/sell swap, extending dollar commitments by three years. Now, they are doing another buy/sell swap, pushing the next set of dollar sales further into the future by 36 months. So far, $20 billion has been postponed by six months through these measures.
As of February, RBI’s bulletin indicated that there were $80 billion in open currency positions, possibly even higher now. When more of these transactions mature, the RBI might sell dollars from its reserves. This is manageable since the rupee has strengthened recently, mainly because the US dollar has weakened, returning to levels seen before the Trump administration’s policies.
Read Here | RBI conducts forex swap worth $10 bn to inject liquidity
One key effect of these swaps is that the cost of hedging dollars in the forward market is expected to decrease significantly—dropping by about 15 basis points, from 6.33% to 6.2%. This makes it cheaper for Indian companies to hedge their dollar transactions, which could encourage more external commercial borrowings (ECBs) and help offset foreign investor outflows.
Additionally, as forward dollar rates drop, exporters might bring in their overseas earnings sooner, boosting liquidity.
Alongside the currency swaps, RBI is injecting ₹1 lakh crore into the bond market through purchases on March 18 and March 24. This is meant to ease liquidity concerns, especially with some repo transactions maturing and a large tax outflow expected. By adding durable liquidity, RBI is ensuring that the banking system has enough cash.
The impact will be positive for banks and non-banking financial companies (NBFCs). Market interest rates will likely drop—10-year bond yields could fall by at least 5 basis points, from 6.73% to around 6.68%. Shorter-term borrowing costs will also decline, benefiting NBFCs.
If this liquidity boost continues, banks may even cut deposit rates, reducing their overall funding costs. This would further improve lending conditions, making it a favourable situation for both banks and NBFCs.
Also Read | RBI to inject ₹1 lakh crore via OMOs, conduct $10B forex swap to fix India’s liquidity crunch
