RBI conducts at least $10 billion FX swaps to drain liquidity
The Reserve Bank of India carried out sell-buy dollar-rupee swaps worth at least $10 billion over the past two weeks to reduce surplus banking liquidity, people familiar with the transactions said. Maturities ranged from one month to about six months. A special FX swap facility launched in June drew $143.6 billion in inflows by September 18, with FCNR(B) deposits the largest share. Reuters said surplus liquidity fell from about Rs 11 trillion to Rs 4.92 trillion by September 21.
Source
RBI · read the original report ↗
Desk check · some claims need care
What the desk checked (5)
- RBI conducted at least $10 billion in sell-buy dollar-rupee swaps over the past two weeks, with one- to six-month maturities. — Attributed only to unnamed people familiar with the transactions cited in reports; not officially confirmed in source.
- Economists estimate RBI could have done $10-15 billion of such swaps maturing within the current financial year. — Presented as an estimate by unnamed economists; clearly flagged as projection, not fact.
- Inflows under the June special FX swap facility reached $143.6 billion by September 18, exceeding $140 billion, with FCNR(B) deposits the largest share. — Attributed to RBI data in the source; figure appears in source and is internally consistent.
- Surplus banking liquidity fell to Rs 4.92 trillion by September 21, down 55% from about Rs 11 trillion earlier this month. — Attributed to Reuters; the 55% decline is roughly consistent with the stated peak and current figures.
- RBI Governor Sanjay Malhotra said the central bank would use tools including bond sales and FX swaps. — Attributed to the Governor as an earlier statement; paraphrased, no direct quote given.
Analysts’ view opinion
The huge foreign inflows drawn in by the RBI's special forex swap facility since June were a success on one measure, but they left the central bank with a second-order problem: too much rupee cash sloshing around the banking system. Carrying out at least $10 billion of sell-buy swaps in two weeks is the RBI's way of keeping the dollars without importing their monetary consequences. The signal is that price stability is being prioritised — but since these are short-dated swaps, this is time bought, not a permanent fix.
- Surplus liquidity falling from about Rs 11 trillion to Rs 4.92 trillion by September 21 — roughly a 55% drop — shows the intervention is working quickly.
- When cash is abundant, short-term borrowing costs drift below the policy rate; draining it hands some of that advantage back, so money-market rates are likely to firm.
- Banks pick up dollars and some forward/fee income, but treasury gains that relied on cheap surplus cash shrink, and competition for deposits could intensify.
- With oil prices elevated, excess cash adds to inflation risk — this is best read as an inflation-defence operation as much as a rupee-management one.
- Maturities of one to six months mean those rupees return to the system later, raising the question of whether the RBI rolls the swaps over or leans harder on bond sales.
What to watch — Watch whether call money and treasury bill rates converge back toward the policy rate, how forward premiums move, and whether the RBI rolls these swaps over as they mature.
The transactions are not officially announced — size and tenor rest on people familiar with the deals — and the story does not establish how much of the liquidity drain came from swaps versus bond sales or seasonal cash demand.
Deep dive
Research brief · 8 facts · 5 dates · exam-readyThe brief
Context
The Reserve Bank of India launched a special foreign exchange swap facility in June to attract overseas funds, which brought in more than $140 billion in foreign currency inflows. Those inflows released a large amount of rupees into the banking system, pushing surplus liquidity to around Rs 11 trillion earlier in September and raising fears that cheap money would fuel inflation. To drain the excess rupees, the RBI has been running sell-buy dollar-rupee swaps with banks — selling dollars for rupees now and reversing the deal later — alongside bond sales. Reports say at least $10 billion of such swaps were done over the past two weeks.
Key facts
- RBI carried out currency swaps worth at least $10 billion over the past two weeks to drain surplus banking liquidity, per people familiar with the transactions cited in reports.
- The transactions were sell-buy dollar-rupee swaps with banks, with maturities ranging from one month to around six months.
- Past publicly announced RBI swap auctions have typically been in tranches of around $3 billion to $5 billion, making the latest operations larger.
- Economists estimate the RBI could have done $10 billion to $15 billion of such swaps maturing within the current financial year.
- RBI's special FX swap facility, launched in June, brought inflows of $143.6 billion by September 18, per RBI data.
- FCNR(B) deposits accounted for the largest share of inflows under the facility.
- Surplus banking liquidity rose to around Rs 11 trillion earlier in the month.
- Reuters reported surplus liquidity had fallen to Rs 4.92 trillion by September 21, down 55% from its recent peak.
Timeline
- JuneRBI launches a special foreign exchange swap facility to attract overseas funds.
- Early SeptemberLarge foreign inflows push surplus banking liquidity to around Rs 11 trillion.
- September 18Total inflows under the special FX swap facility reach $143.6 billion, per RBI data.
- September 21Surplus liquidity falls to Rs 4.92 trillion, down 55% from the recent peak, Reuters reports.
- Past two weeks (as of September 24, 2026)RBI conducts at least $10 billion of sell-buy dollar-rupee swaps with banks.
Who has a stake
- Reserve Bank of India — Must absorb the rupee surplus created by its own inflow-attracting facility without disrupting rates, inflation or the rupee.
- RBI Governor Sanjay Malhotra — Had said the central bank would use different tools, including bond sales and FX swaps, to maintain appropriate liquidity conditions.
- Banks — Counterparties to the sell-buy swaps; they receive dollars and part with rupees, affecting their surplus cash and lending costs.
- FCNR(B) depositors / overseas investors — Largest source of inflows under the special facility; returns depend on the swap facility terms.
- Borrowers and debt markets — Excess cash pushes borrowing costs lower; liquidity withdrawal reverses that and shapes short-term rates.
Why it matters
Liquidity management is the operating arm of monetary policy: too much surplus cash pushes borrowing costs below the policy intent and can stoke inflation, especially with oil prices elevated. The scale of the swaps — bigger than the RBI's usual $3-5 billion tranches — shows how large the spillover from the $143.6 billion inflow drive has been. It also signals the RBI is trying to keep foreign inflows from destabilising both prices and the rupee.
UPSC angle
Prelims pointers
- In a sell-buy dollar-rupee swap, the RBI sells dollars to banks for rupees now and reverses the deal later, temporarily draining rupee liquidity.
- RBI's special FX swap facility was launched in June; inflows reached $143.6 billion by September 18.
- FCNR(B) deposits formed the largest share of inflows under the special facility.
- Surplus banking liquidity fell from about Rs 11 trillion to Rs 4.92 trillion by September 21 — a 55% drop.
- RBI's liquidity absorption tools named in the story: bond sales and FX swaps.
- Sanjay Malhotra is the RBI Governor referred to in the story.
Mains framing
The episode illustrates the classic tension between attracting foreign capital and retaining domestic monetary control. The RBI's special FX swap facility, launched in June, drew $143.6 billion by September 18 — led by FCNR(B) deposits — but every dollar converted released rupees into the banking system, lifting surplus liquidity to about Rs 11 trillion and threatening to drive borrowing costs below policy intent at a time when oil prices remain elevated. The central bank has responded with sterilisation: open market bond sales plus sell-buy dollar-rupee swaps of at least $10 billion in a fortnight, with tenors of one to six months, well above its customary $3-5 billion tranches; economists put the full year's swap book at $10-15 billion maturing within the financial year. Surplus liquidity has already fallen 55% to Rs 4.92 trillion by September 21. The way forward, as Governor Sanjay Malhotra indicated, lies in using a mix of instruments to keep liquidity at "appropriate" levels — but the maturity profile matters, since short-dated swaps will reinject rupees on unwinding, requiring sequenced and transparent operations to avoid volatility in money-market rates and the rupee.
Key terms
- Sell-buy dollar-rupee swap
- RBI sells dollars to banks against rupees and agrees to buy them back later, temporarily withdrawing rupee liquidity from the system.
- Surplus liquidity
- Excess cash banks hold beyond requirements; too much of it lowers borrowing costs and can add to inflation pressure.
- FCNR(B) deposits
- Foreign Currency Non-Resident (Bank) deposits — foreign-currency deposits by non-residents with Indian banks; largest share of the facility's inflows.
- Special FX swap facility
- RBI window launched in June to attract overseas funds; inflows reached $143.6 billion by September 18.
- Bond sales (open market operations)
- RBI selling government securities to banks to absorb rupee liquidity, used alongside FX swaps.
Practice questions
- Explain how a sell-buy foreign exchange swap drains rupee liquidity, and why the RBI needed to use it after its June special FX swap facility.
- "Attracting large foreign currency inflows can complicate domestic monetary management." Discuss with reference to the RBI's 2026 liquidity operations.
- Compare bond sales and FX swaps as instruments of liquidity absorption. What risks arise when swaps have short maturities of one to six months?
Grounded only in the source report — figures and dates are the source's, not inferred.