RBI's $5B Swap Targets Forward Premiums, Not Liquidity

The Reserve Bank of India's surprise $5 billion dollar-rupee buy/sell swap auction on 26 May is a surgical intervention in the forward currency market, not a broad liquidity injection. The three-year swap, announced on Wednesday, targets forward premiums that surged to 4% and a rupee that tested a record low of 96.83 before recovering to 96.20 by Thursday's close. Four market participants told Mint the move is designed to reorganize the RBI's forward book and reduce stress from frequent monthly rollovers.

The $5 Billion Swap: Reordering the Forward Book

Under the buy/sell swap, the RBI buys dollars from commercial banks for rupees and simultaneously agrees to sell the dollars back at a predetermined future date. The three-year tenor replaces the monthly rollover cycle that had concentrated stress at each maturity.

“This is just reordering the maturity of forwards so that the amount of stress reduces on a monthly basis,” a senior economist said on condition of anonymity. “It’s not meant to inject liquidity… Basically, whatever swaps are going to mature, instead of being rolled over for one month, they’ve been rolled over for three years. It isn’t that extra money is coming in. It’s just getting rolled over in a more organized way.”

The announcement produced an immediate yield effect. Madan Sabnavis, chief economist at Bank of Baroda, said the swap was designed to cool elevated forward premiums.

“Once I am making this announcement saying that I am going to buy dollars and provide liquidity, that will bring down the forward rates,” he said.

Why Three Years?

The three-year maturity aligns with the RBI's existing forward book composition. A longer tenor reduces the frequency of rollover decisions and limits the speculative pressure that builds when banks are forced to roll short-dated swaps at stressed levels. The mechanic is distinct from open market operations: the RBI avoids buying government securities that banks need for liquidity coverage ratio compliance, a constraint that has made OMOs less palatable.

Forward Premiums: From 2.78% to 3.45% in Six Months

The pressure in the forward market had been building since late March. According to Bloomberg data, the one-year forward premium stood at 3.45% as of Thursday, up 67 basis points from 2.78% on 27 March. That spike followed the RBI's decision to cap banks' net open positions at $100 million at the end of each day to curb offshore speculation.

Source: Bloomberg, RBI

The swap announcement is designed to flatten that curve. By offering a structured forward sale at a known price, the RBI gives banks an alternative to the rolled-over short-dated contracts that had been driving premiums higher.

The Rupee Reaction: Record Low, Intraday Reversal, and the Spot Backstop

The spot market absorbed the swap announcement with a sharp intraday reversal. The rupee touched a record low of 96.83 against the dollar on Wednesday before opening stronger on Thursday at 96.34. It briefly touched the 100 mark in the one-year futures market, then recovered to trade at 96.43 after US President Donald Trump indicated that negotiations with Iran were entering their final stages. The local unit closed at 96.20 on Thursday.

Market participants said the RBI reinforced the swap with spot intervention.