The Reserve Bank of India (RBI) is using short-term currency swaps to manage excess rupee liquidity in the banking system. The surplus emerged after a government program launched on June 8, 2026, to attract foreign-currency non-resident deposits and external commercial borrowings exceeded expectations.
The initial target for inflows was $80 billion, but the actual amount reached between $128 billion and $136 billion. As depositors converted foreign currency into rupees, the domestic banking system experienced a significant increase in liquidity.
To absorb the surplus, the RBI is conducting sell-buy USD/INR foreign exchange swaps. In these transactions, the central bank sells dollars to banks and agrees to repurchase them later, temporarily removing rupees from circulation.
On September 3, 2026, banks requested that the RBI utilize these swaps instead of increasing the cash reserve ratio (CRR). Banks prefer swaps because they are temporary and do not impact profitability as severely as a permanent CRR hike.
The RBI has executed swaps estimated at $700 million, which are scheduled to mature in September and October 2026. This activity has already influenced near-term rupee forward premiums, shifting the supply-demand balance in the forward curve.
