RBI Likely to Restart FX Swaps to Boost Market Liquidity

The RBI’s quiet use of foreign exchange swaps shows it is trying to manage liquidity and reduce pressure on the rupee.

Can a single policy tool cool rising dollar demand and ease liquidity stress at once? The Reserve Bank of India (RBI) is counting on it. 

According to a Reuters report dated 15 October 2025, the Indian central bank has decided to restart foreign exchange swaps after a pause of several months. The decision comes as dollar demand rises while rupee liquidity in the banking system tightens sharply.

The report notes that the RBI’s earlier ₹2.5 trillion cash reserve ratio (CRR) cut released only about half of the expected liquidity because of its ongoing dollar sales in the spot market. This renewed step underlines that Reserve Bank of India liquidity measures are being recalibrated once again to maintain balance between currency stability and market liquidity.

What is Indian Central Bank Foreign Exchange Swaps?

Foreign exchange swaps are agreements where the RBI sells dollars in exchange for rupees today and buys them back later at a fixed premium. The purpose is to provide short-term dollar liquidity without permanently altering the domestic money supply. These swaps are a core part of foreign exchange liquidity management in India.

In 2025, two swap operations stood out. The January 2025 USD/INR sell-buy swap injected USD 5.1 billion for six months. A later March 2025 operation offered USD 10 billion for a three-year term. Both were oversubscribed, showing the high demand for dollar liquidity among banks.
 

These numbers were reported in the Reuters Market Operations Report 2025 and confirmed the market’s appetite for long-tenor liquidity instruments. Analysts believe the RBI may now introduce a similar auction to restore balance between rupee and dollar flows.

The renewed activity in 2025 differs from earlier years because the focus has shifted to longer-duration operations that reduce frequent rollover risks.

RBI Intervention In Forex Markets Reflects A Familiar Pattern

The RBI has used swaps earlier during turbulent periods. In March 2020, during the early phase of the pandemic, it conducted two six-month USD/INR swaps worth USD 2.71 billion, according to the RBI’s March 2020 Monetary Report. The goal was to ease panic-driven dollar shortages.

In 2022, the central bank sold dollars directly in the market to protect the rupee, which resulted in neutral liquidity conditions. By contrast, the current RBI intervention in forex markets aims to infuse liquidity, not withdraw it.
 

The comparison shows a pattern: the RBI often turns to swaps when currency pressure collides with funding stress.

This strategy links closely with the earlier story “RBI Announces Groundbreaking $10 Billion Forex Swap to Infuse Rupee Liquidity” published in March 2025. That report, available here, highlighted how the RBI’s large-scale swaps stabilised liquidity in early 2025.

India Currency Swap Operations 2025: The Shift In Strategy

The latest development in India currency swap operations 2025 indicates a shift from short-term corrections to medium-term liquidity management. Market participants expect the new swaps to run between 12 and 18 months.

According to Bloomberg’s October 2025 market data, India’s net short dollar book stood at USD 53.4 billion in August 2025, compared with USD 88.8 billion in February 2025. This sharp decline means that fewer forward obligations are pending, giving the RBI more headroom to restart fresh swaps.
 

This table illustrates why the RBI acted. The banking system’s liquidity turned from surplus to deficit in just six months. Analysts expect that the next swap auctions could release about USD 7–8 billion to correct this gap.

The data also indicates that while forex reserves remain comfortable, their slight dip shows consistent interventions to manage rupee movements.

Foreign Exchange Liquidity Management in India

Foreign exchange liquidity management in India is not only about supplying dollars. It is also about ensuring that domestic money markets stay stable. A shortage of rupee liquidity can push up short-term borrowing costs, which hurts banks and corporates.

The rupee recently touched ₹87.90 per dollar, its strongest level in October 2025 after RBI intervention. Analysts believe that additional swap auctions could keep the rupee steady without draining reserves too fast.
 

Experts cited in Reuters’ India Liquidity Report 2025 say that the RBI’s decision could ease overnight call money rates and reduce borrowing pressure on smaller lenders.

The next update from the central bank’s foreign exchange department is likely to include swap size, tenor, and cut-off premiums, giving the market a clearer picture of upcoming liquidity conditions.

Past Reactions Show RBI’s Measured Approach

The government and the RBI have used similar playbooks before. In 2019, during tight liquidity, the RBI carried out buy/sell swaps worth ₹34,874 crore to manage both the currency and bond markets together.

Today’s actions are more cautious. Unlike in 2020, when swaps were forced by panic, the 2025 operations look pre-emptive. The RBI seems to be signaling readiness to support markets if foreign inflows slow or global yields rise.

This tone matches the government’s push for smooth forex flows. The Finance Ministry’s Quarterly Economic Review (September 2025) emphasized using “flexible liquidity tools” to maintain stability.

As LoansJagat describes in “Muted Response to RBI’s VRRR As Overnight Rates Rise”, short-term liquidity tools are now playing a more active role in aligning market rates with policy rates, showing the RBI is being measured in how it steps in. 

Conclusion

The new Indian central bank foreign exchange swaps underline how RBI continues to rely on tested instruments while adapting them to new challenges. By combining dollar injections with sterilised rupee management, the bank is trying to maintain liquidity without triggering inflation.

As market participants await formal details, one thing stands clear, the sound of FX swaps has returned to Mumbai’s trading desks. And this time, the move looks more like careful preparation than crisis response.
 

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