RBI Turns to FX Swaps to Manage Rupee Stress
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- Last Updated: 22 Jan 2026 at 1:47 PM IST
On Wednesday, January 21, the Reserve Bank of India carried out buy-sell USD/INR foreign exchange (FX) swaps across several maturities. According to bankers and foreign exchange brokers, the central bank conducted swaps for spot positions rolling over June, July, August, and October.
Why Is The RBI Swapping FX?
The move is being seen as part of the RBI’s ongoing effort to manage liquidity at a time when the rupee has been under steady pressure. When the central bank steps into the market to support the currency, it usually does so by selling dollars. While this helps curb excessive weakness in the rupee, it also pulls rupee liquidity out of the banking system.
However, FX swaps could mitigate this issue. With FX swaps, the RBI would be able to manage liquidity without necessarily changing its overall position on the value of the currency. Simply put, FX swaps would enable the central bank to give the market rupees, while still engaging in operations in the spot market.
The rupee has been facing challenges from a strong US dollar, higher global interest rates, and uneven foreign investment flows. In light of this, the increase in the usage of swap tools by the RBI indicates that the institution prefers flexible approaches as opposed to forceful tools of intervention.
What Did the Recent 3-Year Swap Tell the Market?
Earlier this month, on January 14, the RBI conducted a 3-year dollar-rupee buy-sell swap, drawing strong interest from market participants. The $10 billion swap received bids worth $29.9 billion, nearly three times the amount on offer.
The cutoff premium for the swap came in at 728 paise. This was notably higher than the previous 3-year swap conducted in February 2025, when the cutoff premium was 655 paise. The rise of 127 paise shows that the cost of accessing dollars through swaps has gone up.
A higher premium usually points to greater demand for dollars and reflects pressure on the local currency. Market participants say this increase clearly mirrors the current state of the rupee.
Premiums have gone up because the rupee has been under that much pressure compared to last year. Around this time last year, the currency was trading in the 85 to 86 range.
What Happens Next?
By distributing the swaps over various maturities, the RBI can manage liquidity and avoid any shocks in the forex market. This helps to stabilise the market while also ensuring that the banks do not find themselves short of rupees.
With global risks still high, the market expects that the central bank will continue to rely on FX swaps as a major instrument. Will this suffice in achieving a balance between rupee stability and domestic liquidity in the coming weeks?
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