RBI Forex Swap Maturity Drains $5 Billion from Market, Testing Rupee’s Strength
The RBI forex swap market is back in focus as the Reserve Bank of India allowed the maturity of a $5 billion foreign exchange swap, tightening liquidity in the banking system and prompting traders to reassess the short-term outlook for the Indian rupee.
The RBI forex swap mechanism, used in 2022 to inject US dollars into the domestic market, reached maturity this week. As the swap unwinds, banks must return dollars to the RBI, effectively removing billions in liquidity from the rupee money market. This move is already rippling across India’s short-term rates and spot FX pricing.
Traders say the RBI forex swap maturity has increased demand for dollars, pushing the USD/INR pair closer to 83.40 in early Asian trading. Overnight call money rates also ticked higher as liquidity conditions tightened.
“The RBI forex swap was always going to be a double-edged sword,” said Mumbai-based currency strategist Rohan Mehta. “It provided much-needed dollar liquidity during a period of stress, but its maturity is now a stress event in itself.”
Why It Matters for INR Stability
The RBI forex swap maturity coincides with seasonal dollar demand from oil importers and corporates, amplifying its impact. Dealers warn that if the RBI doesn’t take offsetting liquidity measures like bond buybacks or fresh swaps the rupee could remain under pressure in the coming weeks.
Foreign portfolio investors have been net sellers of Indian equities in July, adding to downward pressure on the currency. Market participants now expect the central bank to step in with fresh operations if USD/INR breaches the 83.50–83.60 resistance zone.
The Broader Policy Context
The RBI forex swap tool is part of a broader strategy to smooth volatility in the rupee without committing to a fixed exchange rate. By conducting buy/sell swaps, the RBI can manage both currency levels and domestic liquidity critical in an emerging market facing both inflationary pressures and volatile capital flows.
Analysts note that this latest RBI forex swap maturity is being closely watched as a test of India’s FX resilience. “If the rupee holds despite the drain, it will signal strong fundamentals,” says Priya Menon, an economist at Nomura India.
What Comes Next?
Markets are now awaiting cues from the RBI’s next policy meeting, where any commentary on RBI forex swap operations will be dissected for hints on intervention strategy. Some traders speculate the central bank may conduct a fresh buy/sell swap to replenish liquidity, particularly if global crude prices spike again.
For now, the message from Mumbai’s dealing rooms is clear: the RBI forex swap maturity has shifted the near-term balance of risk for the rupee and traders are bracing for a more volatile August.
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