In News:

The Reserve Bank of India (RBI) has announced its largest-ever USD-INR Buy/Sell Swap Auction worth $10 billionfor a tenor of three years. This strategic move is aimed at addressing the persistent liquidity deficit in the banking system and stabilizing the Rupee-Dollar exchange rate.

What is a USD-INR Buy/Sell Swap Auction?

A Dollar/Rupee Buy-Sell Swap Auction is a foreign exchange (forex) tool used by RBI to manage domestic liquidity and curb currency volatility. It is a two-leg transaction:

• First Leg (Buy Phase):Banks sell US dollars to the RBI and receive rupee liquidity.
• Reverse Leg (Sell Phase):RBI sells back the same amount of US dollars to banks at a future date (here, after 3 years), along with a swap premium.

Key Features of the February 2025 Swap Auction:

• Auction Size: USD 10 billion
• Tenor: 3 years (long-term)
• Rupee Liquidity Injected: Approx. ?86,000 crore
• Auction Date: 28 February 2025
• Spot Settlement Date: 4 March 2025
• Far-leg Settlement Date: 6 March 2028
• Reference Rate: Based on FBIL (Financial Benchmarks India Pvt Ltd) benchmark

Objectives and Benefits:

• Liquidity Management:
  • Addresses durable liquidity needs; helps ease banking system deficit (estimated at ?1.7 lakh crore).
  • Supports credit flow to businesses, aiding economic growth.
• Exchange Rate Stability:
  • Reduces volatility in the USD/INR rate (expected to stabilize around ?86.30).
  • Mitigates pressure from foreign fund outflows.
• Efficient Forex Reserve Utilization:
  • Uses RBI’s reserves productively to manage monetary conditions.
• Enhances Policy Transmission:
  • Aligns money market interest rates with RBI’s monetary policy stance.
• Supports Inflation Control:
  • Infuses liquidity without directly adding to inflationary pressures.

Challenges and Limitations:

• Impact on Forex Reserves:Large-scale swaps temporarily tie up reserves.
• Global Dependencies:Effectiveness may be affected by global interest rate differentials, capital flows, and external shocks.
• Market Speculation Risks:Poor timing or execution could trigger speculative activity in the forex market.
• Temporary Measure:Swap auctions offer short- to medium-term relief; structural reforms are needed for long-term liquidity management.