The Reserve Bank of India (RBI) is set to reverse a $5 billion dollar-rupee buy-sell swap on Monday, which could potentially drain ₹43,000 crore from the banking system. The operation is the second leg of a six-month swap, where the RBI initially purchased dollars in exchange for rupees to inject domestic liquidity. The swap was one of three operations totaling $25 billion, carried out between January and March to ease tight liquidity conditions.
The RBI has two options: to give the dollar delivery, which would simultaneously drain out rupee liquidity, or to roll over the swap. Currently, the banking system has a liquidity surplus of ₹2.86 lakh crore, and with the upcoming cut in the cash reserve ratio set to release additional liquidity, the RBI is expected to allow the $5 billion swap to mature. However, some traders and economists believe that the RBI may opt to partially roll over the swap to limit dollar outflows, especially after the rupee’s recent sharp decline against the US dollar.
The RBI has been gradually reducing its forward book size by allowing near-term swaps to mature, but the recent rupee depreciation may prompt the central bank to reconsider its strategy. According to Gaura Sen Gupta, chief economist at IDFC First Bank, allowing full maturity of the swap could exert pressure on the rupee, leading to further depreciation. As a result, the RBI may choose to partially roll over the swap to mitigate the impact on the currency.
The outcome of the swap reversal will have significant implications for the banking system and the Indian economy. If the RBI chooses to drain liquidity from the system, it could help to reduce inflationary pressures and stabilize the currency. On the other hand, if the RBI decides to roll over the swap, it could provide a boost to the economy by maintaining liquidity and supporting growth. The decision will be closely watched by market participants and economists, who will be looking for clues on the RBI’s monetary policy stance and its approach to managing the economy.