Context:
The Reserve Bank of India (RBI) has introduced a dollar denominated rupee swap auction to inject $10 billion into the economy. This is done to meet long term liquidity concerns of domestic banks.
Comparison with Earlier Swap Auctions
- This would be the second such rupee infusion within a month.
- Had a first assignment of $5 billion on January 31, 2025, with a tenor of six months.
- The latest $10 billion tranche has a three year duration, indicating a focus on long term liquidity stability.
- The combined effects of either of the two swaps are expected to inject 1.3 trillion rupees in the Indian banking system.
Reason Behind the Action
- The RBI’s goal is to stabilize the rupee, overcome liquidity constraints, and control inflationary pressures.
- Economists suggest that an additional $5 billion swap may be required to fully address the ₹1.7 trillion liquidity shortfall in Indian banks as of February 20, 2025.
Existing Economic Drags
- Rupee depreciation
- The Indian rupee has fallen 3.3% against the U.S. dollar since October 2024, crossing ₹85 per dollar on December 19, 2024.
- Foreign outflows
- In this period of time, about $31 billion exited from Indian equity markets.
- Forex reserve depletion
- The RBI has already sold about $111.2 billion (~18% of forex reserves).
Long Term Economic Effect
- Today’s challenges are more pressing because, unlike 2019, when forex reserves were rising, today, they are also being sustained.
- These banks need to use this liquidity to provide credit so that economic momentum is strong in terms of investment, employment, wage growth and consumption.
- Al these measures could push GDP growth in India beyond the current 6.4%, notwithstanding global economic headwinds.
This newest dollar rupee swap isn’t a proactive measure, just like the first; rather, it’s stabilization of the rupee with possible liquidity constraints. How well the additional liquidity gets put to use by Indian banks would determine how effective the change proves to be.
