RBI Forex Swap Facility and Liquidity Management Operations

#GS-3 #Economy #Banking #Monetary Policy #Foreign Exchange #Reserve Bank of India

Key takeaways

The RBI mobilized over USD 143.5 billion through its special forex swap facility launched in June 2026 to support the rupee.
FCNR(B) deposits formed the majority of foreign inflows by contributing USD 132 billion out of the total mobilised funds.
The RBI absorbed Rs 71,971 crore via an overnight VRRR auction to manage a banking system cash surplus of Rs 4.92 lakh crore.
The central bank uses Open Market Operations (OMO) sales of Government securities to permanently withdraw excess rupee liquidity.

The Reserve Bank of India (RBI) raised over USD 143.5 billion through its special forex swap facility to stabilize the domestic currency.
The central bank simultaneously deployed liquidity absorption tools to manage a massive Rs 4.92 lakh crore cash surplus in the banking system.

The RBI rolled out the swap window in June 2026 to let commercial banks exchange their foreign currency inflows for Indian rupees.
This facility protects commercial banks from exchange rate risks on Foreign Currency Non-Resident (Bank) (FCNR(B)) deposits and External Commercial Borrowings (ECBs).
The primary goal of this tool is to boost US dollar inflows, improve forex market liquidity, and stop the rupee from weakening.

Out of the USD 143.5 billion collected by September 2026, FCNR(B) deposits accounted for the vast majority at USD 132 billion.
The remaining funds came through Overseas Foreign Currency Borrowings (OFCBs) and External Commercial Borrowings (ECBs).

The RBI conducted an overnight VRRR auction to absorb Rs 71,971 crore from the banking system to manage the cash surplus.
The VRRR is an active monetary policy tool under the Liquidity Adjustment Facility (LAF) that absorbs excess bank funds for a fixed time.
This operation helps keep short-term overnight money market rates aligned with the benchmark repo rate.
Commercial banks set the interest rate during a VRRR auction through competitive bidding, unlike fixed-rate reverse repos.

Alongside VRRR, the RBI conducts Open Market Operations (OMO) to permanently pull out excess rupee liquidity.
The central bank achieves this permanent liquidity drain by selling Government securities directly in the open market.