The Reserve Bank of India has carried out currency swaps worth at least $10 billion over the past two weeks as it steps up efforts to reduce surplus liquidity in the banking system. 

The move comes after a sharp rise in foreign currency inflows created a large rupee cash surplus and raised concerns about inflation risks.

According to people familiar with the transactions cited in reports, the RBI conducted sell-buy dollar-rupee swaps with banks, with maturities ranging from one month to around six months. 

Under these transactions, the central bank sells dollars to banks in exchange for rupees and agrees to reverse the transaction at a later date. This allows the RBI to temporarily remove rupees from the financial system.

The latest operations are larger than many of the RBI’s publicly announced swap transactions in recent years. Such auctions have typically been conducted in tranches of around $3 billion to $5 billion. Economists estimate that the RBI could have carried out $10 billion to $15 billion of such swaps maturing within the current financial year.

The liquidity build-up followed the RBI’s special foreign exchange swap facility launched in June to attract overseas funds. The facility brought in more than $140 billion in foreign currency inflows, with FCNR(B) deposits accounting for the largest share. RBI data showed total inflows under the facility had reached $143.6 billion by September 18.

The large inflows pushed surplus banking liquidity to around Rs 11 trillion earlier this month. The RBI has since used multiple tools, including bond sales and FX swaps, to absorb excess cash. Reuters reported that surplus liquidity had already fallen to Rs 4.92 trillion by September 21, down 55% from its recent peak.

The liquidity management is important for monetary policy as excess cash can push borrowing costs lower and add to inflationary pressures, particularly when oil prices remain elevated. RBI Governor Sanjay Malhotra had earlier said the central bank would use different tools, including bond sales and FX swaps, to maintain appropriate liquidity conditions.

For markets, the latest action signals that the RBI is focused on preventing the huge foreign inflows from creating an excessive liquidity surplus while also managing risks to inflation and the rupee.

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