Reserve Bank of India Implements Currency Swaps to Manage Excess Liquidity

The Reserve Bank of India (RBI) is actively using currency swaps to manage an unprecedented surplus of rupee liquidity within the banking system. This situation arose after the RBI's initiative to attract foreign-currency non-resident deposits, which exceeded expectations, resulting in a liquidity influx of between 128 billion and 136 billion dollars.

As of September 2026, estimates indicate that surplus rupee liquidity in the banking sector ranged from 9.7 trillion to 15 trillion rupees. In response, the RBI aims to drain approximately 7 trillion rupees through various tools, including variable-rate reverse repos and foreign-exchange swaps.

The central bank's currency swap mechanism involves selling dollars to banks and agreeing to repurchase them later, effectively removing excess rupee cash from circulation temporarily. This strategy has been favored over raising the cash reserve ratio (CRR), which would require banks to set aside a larger portion of deposits without earning interest, potentially impacting their profitability.

Market participants have reacted to the RBI's actions, with near-term rupee forward premiums reflecting upward pressure due to the central bank's swap activities. While the liquidity surplus generally facilitates easier funding for banks, the methods employed to drain this excess liquidity come with their own costs and implications for the banking sector.

As the RBI executes swaps worth around 700 million dollars set to mature in the coming months, the banking sector is closely monitoring the situation to gauge the impact on credit growth and lending rates.

Recent Developments in RBI's FX-Retail Platform

• The Reserve Bank of India has added five new currency pairs to its FX-Retail platform, expanding from the original USD/INR pair.
• Since its launch on August 5, 2019, the platform has allowed retail customers to trade at interbank rates, leading to savings of approximately 1.50 to 2 rupees per US dollar compared to conventional bank rates.
• The platform is managed by Clearcorp Dealing Systems (India) Ltd and allows individual trades up to $5 million with no daily transaction limits.
• For volumes up to $50,000, the Clearing Corporation of India charges zero fees.
• The RBI has been monitoring banks quarterly, encouraging them to onboard more retail clients and enhance competitive pricing.
• A pilot project integrating FX-Retail with the Bharat Connect system was conducted in October 2025, involving major banks like Axis, SBI, and ICICI.
• Financial Benchmarks India Ltd plans to include additional currencies in late 2025 as part of RBI's initiatives to diversify away from dollar dependence.