The Reserve Bank of India (RBI) on Friday announced a massive $10 billion liquidity infusion through a dollar-rupee buy/sell swap.

Under such an arrangement, the central bank purchases dollars from banks in lieu of the rupee, thereby injecting liquidity into the system. This is reversed after a certain period of time at the forward rate.

This is the second time in this calendar year that the RBI is conducting such an operation. Back in January, it had conducted a $5 billion dollar-rupee buy/sell swap. The auction saw participants submitting bids of $25.59 billion.

The banking system liquidity has been in deficit since December because of the RBI’s intervention in the forex markets, advance tax payments, GST outflows and subdued government spending.

The RBI has announced several steps to infuse liquidity in the system. This has resulted in bringing down the deficit from over ₹3 trillion. Currently, the shortage stands at ₹1.87 trillion.

However, it is expected to widen next month because of tax outflows, thereby necessitating such an action from the central bank.

The RBI on Friday announced that it will conduct a $10 billion swap auction for a tenor of three years on February 28. The first leg of the transaction would be settled on March 4. It will be reversed or closed on March 6, 2028.

RBI governor Sanjay Malhotra has attributed the drainage of liquidity to advance tax payments in December 2024, capital outflows, forex operations and a significant pickup in currency in circulation in January this year.

At the forex markets, the rupee on Friday closed weaker at 86.71 against the dollar against the previous close of 86.66.

PTI