RBI Injects Rs 40,000 Crore to Boost Liquidity in Financial System

The Reserve Bank of India (RBI) has successfully completed a $5-billion dollar/rupee swap, adding more than Rs 40,000 crore to the financial system. This move aims to strengthen foreign exchange reserves amidst continuous dollar inflows and tight liquidity conditions. The central bank opted for the delivery of the swap, providing rupee liquidity to banks while gaining Dollar liquidity.

In a sell/buy foreign exchange swap, banks buy US Dollars from the RBI and commit to selling back the same amount at the end of the swap period. By choosing not to roll over the swap, the RBI ensures sustained Rupee liquidity in the banking system.

This injection of durable liquidity is expected to alleviate short-term liquidity shortages in the banking sector for an extended period.

Initially conducted on March 8, 2022, the dollar/rupee sell-buy swap auction allowed banks to buy $5 billion from the RBI, with the option for the central bank to fully or partially roll over the swap. Experts suggest that the decision to take delivery, either partially or entirely, was influenced by liquidity tightness and continuous dollar inflows, leading to an increase in forward premiums.

Although there was temporary relief from liquidity shortages last week, caution is advised as advance tax and GST-related outflows, anticipated around March 15 and March 20 respectively, could strain liquidity once more, with an estimated Rs 2.5 trillion outflow from the banking system.

The RBI received bids totaling $13.565 billion for the 2-year $5 billion sell/buy swap, allocating $5.135 billion. Settlement dates for the first and second legs of the swap were March 10, 2022, and March 11, 2024, respectively.