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During recent informal talks, some banks proposed that the Reserve Bank of India (RBI) consider using FX swaps—agreements to exchange currencies in the spot market and reverse the transaction later—to inject rupee liquidity into the market, Bloomberg reported. These requests follow a sharp rise in currency borrowing costs on Monday, driven by seasonal factors and heightened demand for rupees as global investors vie for Indian IPOs, sources said.
The surge in financing costs poses a dilemma for the RBI, which is already grappling with slowing manufacturing activity. While it’s unclear if the central bank will heed these requests, such measures could exacerbate pressures on the rupee, which has hit record lows since December, Bloomberg noted. The RBI has yet to respond to requests for comment.
On Monday, tomorrow-next forward points for the rupee climbed to levels unseen since early 2021, and one-year implied forward yields hovered near two-year highs, reflecting elevated hedging costs. A cash crunch linked to banks facilitating local share sales and their reluctance to swap rupees for dollars due to tight liquidity have worsened the funding squeeze.
If implemented, FX swaps would involve the RBI purchasing dollars from banks in exchange for rupees, with a commitment to reverse the transaction at a later date. This would inject rupee liquidity while boosting foreign-exchange reserves, which recently hit a seven-month low amid the RBI’s interventions to stabilise the rupee.
The RBI last executed a long-term FX swap in April 2019, injecting $5 billion over a three-year tenure. Market observers believe a similar move could alleviate current liquidity pressures while simultaneously strengthening reserves.
