RBI To Provide Liquidity Via USD 10 Billion Swap Auction

The Reserve Bank of India (RBI) has issued the news that it will hold a USD/INR Buy/Sell swap auction of 10 billion dollars to regulate liquidity in the financial system. The auction is set to be held on March 24, 2025, with the settlement date being March 26, 2025, and the reverse transaction to be done on March 27, 2028. The step is taken by RBI as part of its constant efforts to maintain liquidity stability in the economy of India.

The auction of the swap will permit participating eligible market players, that is, AD category-I banks, to quote bids on the premium they want to pay to the RBI for the swap term of three years. The bids will be quoted in paisa terms to two decimal places. The auction will be a multiple-price auction, wherein the successful bidders will be accepted at their respective quoted premiums.

Under the swap arrangement, participating banks will sell US dollars to the RBI in the first leg of the transaction at the Financial Benchmarks India Private Ltd. (FBIL) reference rate on the auction date. In return, the RBI will credit rupee funds to the bank’s current account. The bank will be required to deliver the agreed US dollar amount to the RBI’s nostro account.

At the second leg, to be held on March 27, 2028, the RBI will distribute the rupee balances to the bank, and the bank will repay an equal US dollar amount plus the contracted swap premium to the RBI.

RBI has specified clear guidelines for the process of swap auction. Minimum bid size will be USD 10 million with bids in increments of USD 1 million allowed. Banks are allowed to offer more than one bid, but the aggregate of bids from any single participant should not exceed the amount of auction notified.

In order to calculate the cut-off premium for the final level, all of the bids will be listed in descending order as per the premium quoted. Cut-off will be established at that level where the total accepted USD will be. Those bids that are below this limit will be turned down. A pro-rata allocation system will be implemented for those bids tied at the cut-off premium in case of occurrence.

Participants are required to submit their bids by email on their official letterhead, along with the prescribed form and an accompanying Excel sheet. All submissions have to be sent to RBI’s Financial Markets Operations Department before the auction window closes.

RBI has specified that no bids to change or withdrawal of bids will be accepted after they are placed. Banks selling in the auction are also exempt from normal International Swaps and Derivatives Association (ISDA) norms specifically for this transaction.

Results of the auction would be declared on the same date, with RBI reserving a right to accept bids lower than the aggregate notified amount of USD or slightly above if rounding needs to be adjusted. The central bank also reserves the right to reject bids without assigning any particular reason.

This USD/INR Buy/Sell swap auction is part of RBI’s broader strategy to manage liquidity conditions effectively. By injecting liquidity through this method, the RBI aims to stabilise market volatility, support the financial system, and ensure sufficient liquidity in the banking sector.

Such swap auctions are particularly useful in addressing short-term liquidity pressures, especially during periods of fluctuating foreign exchange reserves or when the banking system requires additional funds. The USD 10 billion swap is a significant move that reflects RBI’s proactive approach to balancing market conditions and supporting economic stability.

Market participants will be closely watching the auction results, as they may influence exchange rates, banking liquidity, and overall market sentiment. With clear guidelines and a structured process, RBI’s initiative is expected to provide greater stability and predictability for financial institutions navigating currency risks and liquidity challenges.