RBI to pump liquidity with $5 billion forex swap as rupee stays under pressure

The Reserve Bank of India (RBI) cut the repo rate by 25 basis points to 5.25%. With this, the central bank has reduced rates by a total of 125 bps since February 2025. The decision was unanimous, with all six members of the Monetary Policy Committee voting for the cut.

RBI Governor Malhotra said inflation has cooled sharply over the past two months, falling below the lower end of the central bank’s comfort band. At the same time, economic growth has remained strong. This combination -- fast disinflation and solid growth -- gave the RBI room to ease policy again.

To support the rate cut and ensure the lower rates quickly pass through to the system, the RBI also announced two major liquidity measures -- Rs 1 trillion in open market bond purchases (OMOs) and a $5 billion dollar -- rupee swap.


These tools are meant to make sure banks have enough money to lend and that borrowing costs fall smoothly across the economy.

Why is RBI doing such a swap?
A dollar-rupee swap is a way for the RBI to inject liquidity without permanently increasing rupee supply. The RBI sells dollars and receives rupees now, which adds rupees to the banking system. Later, the RBI will buy back the dollars on a pre-decided date.

Read More: RBI MPC Outcome | RBI MPC cuts repo rate by 25 bps to 5.25%, Catch all live updates here

This gives banks short-term liquidity exactly when the RBI wants to make borrowing easier -- especially after a rate cut -- but without committing to long-term money printing. It also helps stabilise the currency when the rupee is under pressure.

The rupee had briefly hit a record low of 90.42 in the previous session, but state-run and foreign banks were seen selling dollars, according to a Reuters report and traders cut some of their short bets, helping the currency recover slightly. Even so, most currency experts believe the rupee’s overall trend remains weak.

Before the policy announcement, traders were cautious about taking fresh positions after India reported stronger-than-expected GDP growth. Many had already unwound bets on an aggressive rate cut once the rupee crossed 90.

The policy decision is expected to impact not just the spot rupee but also the forward market. Dollar-rupee forward premiums have jumped in recent sessions, with the 1-year implied yield at 2.50%, up nearly 30 bps this week. The 1-month premium has risen to 22 paisa from 16.5 paisa last week, reflecting expectations of tighter dollar liquidity.

Bond markets reacted immediately to the decision. The 10-year government bond yield slipped to 6.51%, while equity markets were mostly flat, with the Nifty 50 little changed on the day.

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