Forex swap auction
Also called: Buy/sell swap, Sell/buy swap, Dollar-rupee swap · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT
Meaning
In a forex swap auction, the RBI trades dollars for rupees now and agrees to reverse the trade on a set future date. In a buy/sell swap, the RBI buys dollars from banks and pays them rupees. This adds rupee liquidity (ready money in the system) for the whole swap period. In a sell/buy swap, the RBI sells dollars and takes in rupees, which absorbs liquidity. The swap is reversed later, so it is a durable tool that also helps the RBI manage its forex reserves.
Example
In March 2019, the RBI ran a $5 bn buy/sell swap for 3 years. Banks gave dollars and got rupees for three years, which added lasting liquidity. In Feb 2025, a $10 bn, 3-year swap did the same.
Don't confuse with
- Outright forex intervention: the RBI buys or sells dollars for good, with no promise to reverse. The liquidity effect of a swap is temporary and planned, and it ends when the swap matures.
Related concepts
- Long-Term Repo Operations
- Sterilisation
- Market Stabilisation Scheme
- Incremental Cash Reserve Ratio
- Demonetisation