The Reserve Bank of India (RBI) injected an additional $10 billion into the financial system via a dollar/rupee swap auction to address liquidity concerns among domestic lenders.
The concerns arise from foreign capital fleeing Indian stock markets as investors seek better returns in the U.S., driven by President Trump's tax cuts and tariff wars, strengthening the U.S. dollar.
The recent swap auction has a three-year duration, unlike the previous $5 billion auction in January, which had a six-month duration.
The two auctions will inject around ₹1.3 trillion into the banking system.
The swaps aim to stabilize the local currency, ease liquidity issues, and control inflationary pressures during periods of global financial volatility.
Economists estimate an additional $5 billion infusion may be needed to address the ₹1.7 trillion liquidity deficit in India’s banking system as of February 2025.
This is the second long-duration currency swap by RBI, with the first in 2019.
Today’s situation is more challenging due to a weaker rupee and significant capital outflows.
The rupee has depreciated 3.3% against the dollar between October 2024 and February 2025, with foreign investors withdrawing $31 billion from Indian markets.
The RBI has sold around $111.2 billion (18% of its reserves) to stabilize the rupee.
The swap aims to ensure liquidity and support continued credit extension by banks, which could drive capital investment, employment, and GDP growth despite global economic challenges.
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