RBI Injects $5 Billion Through Forex Swap

The Reserve Bank of India (RBI) took a decisive step in December 2025 to stabilize India’s financial markets and ease pressure on the rupee. The central bank announced a USD 5 billion buy-sell forex swap along with large-scale open market operations (OMOs) in government securities worth ₹1 lakh crore. These measures reflected the RBI’s strategy to boost liquidity, support monetary easing, and calm currency volatility during a period of global uncertainty.

This article explains the decision, the mechanics behind the operations, their market impact, and the risks the RBI must now manage.

RBI’s Liquidity Plan: What the Central Bank Announced

The RBI laid out a two-part liquidity programme:

1. A USD 5 Billion Buy-Sell Forex Swap

The RBI scheduled a three-year dollar-rupee buy-sell swap auction for December 16, 2025.
In this operation:

Banks sell dollars to the RBI immediately.
The RBI injects rupees into the banking system.
Banks commit to buy back those dollars after three years at a premium they quote during the auction.

This move increases rupee liquidity without permanently expanding the RBI’s balance sheet.

2. ₹1 Lakh Crore in Open Market Operations (OMOs)

The RBI also announced government bond purchases in two tranches—on December 11 and December 18.
Through OMOs, the RBI buys bonds from banks and releases rupees into the system.

This injection supports long-term liquidity, lowers borrowing costs, and strengthens monetary transmission.

Why the RBI Chose This Moment

India’s financial system faced a mix of seasonal pressures, policy shifts, and external volatility. The RBI responded because several powerful forces converged in December 2025.

1. Money Markets Tightened in December

Banks deal with significant year-end liquidity pressures due to:

Advance tax payments
GST outflows
Higher currency demand during the festive season

These factors reduce the amount of cash circulating in the banking system. The RBI acted early to prevent short-term rates from spiking and disrupting lending conditions.

2. The RBI Reinforced Its December Interest Rate Cut

Earlier in the month, the Monetary Policy Committee cut the repo rate by 25 basis points to 5.25%.
A rate cut works only when liquidity supports it. Tight liquidity can blunt the effect of monetary easing.

The RBI therefore injected money to ensure banks pass on lower rates to borrowers.

3. The Rupee Showed Persistent Weakness

The rupee drifted toward record lows against the dollar in early December. A strong U.S. dollar, global risk aversion, and increased importer demand for dollars added downward pressure.

The RBI normally allows natural market movement, but it intervenes when volatility threatens financial stability. The swap gave the central bank a tool to:

Provide rupees without selling dollars outright
Signal willingness to calm currency swings
Reduce panic among traders and importers

4. Global Markets Remained Volatile

Weak global demand and uncertainty around further U.S. Federal Reserve rate decisions created turbulence in emerging-market currencies.
India acted to shield its money markets from spillover risks.

How the Dollar-Rupee Swap Works

A forex buy-sell swap supplies rupee liquidity while temporarily altering the RBI’s foreign exchange holdings.

Here’s the process in simple terms:

Banks sell USD to the RBI today.
The RBI credits banks with rupees at the current exchange rate.
Banks commit to repurchase the same amount of USD after three years.
Banks pay a premium, which they quote during the auction.

This structure gives the RBI several advantages:

It injects liquidity immediately.
It avoids permanent currency intervention.
It keeps forex reserves stable when viewed over the long run.
It signals confidence because the RBI locks in a long-term swap.

The swap premium reflects how traders expect the rupee to move over the next three years, which gives the RBI valuable market insight.

Why OMOs Matter Alongside the Swap

The swap alone cannot meet long-term liquidity needs. OMOs fill that gap.

Through OMOs:

The RBI buys government bonds.
Banks receive rupees in return.
Bond yields fall because the RBI increases demand for securities.

Lower yields reduce borrowing costs for companies and the government.
When OMOs and forex swaps operate together, they create a strong liquidity cushion:

OMOs support durable, long-term liquidity.
Swaps support immediate, short-term liquidity.

The RBI used both tools because the economy needed broad-based support.

Impact on Markets, the Rupee, and the Banking System

The RBI’s coordinated actions influence multiple parts of the financial system.

1. Banks Gain More Usable Cash

The liquidity injection:

Lowers the need for banks to borrow at high overnight rates
Reduces pressure on interbank markets
Helps banks expand credit to businesses and individuals

More liquidity improves the transmission of monetary policy, ensuring borrowers benefit from lower rates.

2. The Rupee Shows More Stability

Although the RBI did not directly sell dollars, the swap reassured currency markets that the central bank stood ready to manage volatility.

Confidence plays a strong role in currency stability.
When traders see the RBI act decisively, they reduce speculative positions against the rupee.

This stabilizes the exchange rate and reduces panic among import-heavy industries such as energy and electronics.

3. Borrowing Costs Decline

OMOs push down yields on government securities.
Lower yields influence:

Corporate bond markets
Mortgage lending rates
Government borrowing costs

Reduced financial stress encourages investment and supports economic growth.

4. Financial Markets Gain Confidence

Markets tend to reward central banks that communicate clearly and act pre-emptively.
The RBI’s intervention proved that it monitors liquidity closely and responds before conditions worsen.

This boosts investor sentiment—both domestic and foreign.

Risks and Challenges the RBI Must Manage

Even well-designed liquidity measures come with trade-offs.

1. Reserve Composition Changes

The swap temporarily increases rupee liquidity while holding foreign currency claims for the future.
If market stress forces the RBI to conduct several such swaps, analysts may question reserve adequacy.

The RBI must therefore use swaps judiciously.

2. Liquidity Injection Can Spur Inflation

Higher liquidity fuels credit growth and spending.
If supply-side pressures arise at the same time, inflation may climb.

The RBI must monitor inflation carefully and adjust liquidity as needed.

3. The RBI Must Plan the Swap Reversal

Three years from now, banks must buy back the dollars.
If liquidity conditions tighten at that time, the reversal could put pressure on the system.

The RBI will need a well-timed exit strategy.

Conclusion

The RBI’s USD 5 billion forex swap and ₹1 lakh crore in OMOs represent one of the most powerful liquidity packages the central bank has deployed in recent years. The RBI moved quickly to ease year-end money-market stress, protect the rupee, and reinforce its monetary easing cycle.

By combining short-term and long-term liquidity tools, the RBI strengthened financial stability and supported economic confidence during a turbulent global period.

Although risks remain—especially in reserve management and future inflation—the central bank continues to show strong command over liquidity dynamics and currency stability.