1. In this note, we discuss about the forex (foreign exchange) swaps undertaken by the RBI, either through auctions (FX Swap Auctions) or bilaterally through an OTC deal (FX Swaps, also called spot-forward swaps). 2. [Both](RBI_Press%20Release_20200206_Liquidity%20facilities%20under%20revised%20Liquidity%20Management%20Framework.pdf) are liquidity management tools (*Feb 6, 2020*). 3. They are different from [[Bilateral, Multilateral Swaps, LoC, Liquidity Arrangements|currency swaps]] between central banks where interest is paid by the borrower of the reserve currency. 4. Currency swaps involve spot/forward principal exchanges and ongoing interest payments, but forex swaps involve only spot/forward principal exchanges without interest payments 5. The FX swap is the most popular over-the-counter foreign exchange instrument in the global forex market. The daily average turnover of FX swaps was US$ 2.4 trillion in April 2016 on a “net-net basis” (RBI Annual Report, 2019). 6. It is a combination of spot (1st leg) + forward (2nd leg) transactions. 7. Here interest is accrued in both the currencies, and the final (second leg) exchange rate includes it. 8. They are used with primary objective to either manage domestic rupee liquidity or the dollar liquidity in the foreign exchange market 9. The swaps can be categorised based on tenor and objective. 10. Forex swaps - They are ad-hoc, discretionary short-tenor (less than a year) swaps. 1. They are not done through auctions but executed through spot-forward swaps on CCIL's FX-CLEAR. 1. USD/INR Sell (dollars)/Buy (Rupees) swaps - provide dollars in the foreign exchange market and absorb/neutralise/withdraw surplus liquidity in the system 2. USD/INR Buy (dollars)/Sell (Rupees) swaps - inject rupee liquidity and increase RBI's forex reserves temporarily, ## Forex Swap Auctions undertaken by RBI 1. Forex swap auctions (FX Swap Auctions) - These are longer tenor swaps, and conducted through auctions where bids are sent through email to Financial Markets Operations Department. 2. They usually involve USD as the foreign currency. 3. So these auctions can be: 1. USD/INR Buy/Sell Swap Auction 2. USD/INR Sell/Buy Swap Auction ### USD/INR Buy/Sell Swap Auction 1. It is between RBI and [[Forex Markets#^548b72|Authorised Dealers (ADs) – Category I banks]]. 2. Two legs of transaction: 1. Spot - In the first leg of the transaction, the bank will sell US Dollars to the Reserve Bank at FBIL Reference Rate of the auction date. The settlement of the first leg of the swap will take place on spot basis from the date of transaction and the Reserve Bank will credit the Rupee funds to the current account of the successful bidder and the bidder needs to deliver US Dollars into the RBI’s nostro account. 2. So a bank’s account get credited with the INR (domestic currency) equivalent of the foreign exchange purchased by the central bank (RBI), and the banks’ foreign assets decline. Thus, reserve money increases, which normally causes an expansion of the money supply. 3. Forward - In the reverse leg of the swap transaction, Rupee funds will have to be returned to the Reserve Bank along with the swap premium to get the US Dollars back. 4. The premium is based on the covered interest parity (CIP). $F=S \times \dfrac{(1+i_f​)}{(1+i_d​)}​$ where 1. F= forward rate of US dollar (foreign currency) in terms of rupee (domestic currency). 2. S = spot rate (USDINR) 3. $\large{i_d}$​= domestic risk-free interest rate (INR) 4. $\large{i_f}$ = foreign risk interest rate (USD) 5. The auctions will be multiple price based 6. Banks that bid with higher forward points (that is ready to pay more to RBI for forward dollars) are more likely to get accepted in the bids, while bids quoting lower forward points get rejected. 3. They are used when rupee liquidity is tight, RBI wants to avoid using OMO purchases to inject liquidity, and is done after a high volume of sales of dollar in the spot inter-bank market by RBI to put back rupee liquidity into the banking system, and replenish/gain forex reserves (recoup the NFA losses) for the tenor of the swap. 4. It works just like long-term repo (loan by RBI) but collateral by banks is foreign exchange. 5. So a buy/sell swap by the RBI is an expansionary swap. 6. There is no exchange risk for any party as both the legs lock the rate. It is will be used by those banks (or for their foreign clients that have borrowed in dollars to invest in rupee assets, companies that want to hedge their ECB of foreign currency), or and/or engage in speculation (that is rupee is going to weaken more than the forward rate). 7. Forex reserves - The US dollar amounts mobilised through the swap auctions increases RBI's [[WSS - Weekly Forex Reserves#1.1 Foreign Currency Assets (FCA)|foreign currency assets]] (foreign exchange reserves) for the tenor of the swap. 8. **Reserve Money -** The banks' accounts(that is reserves maintained with the RBI) get credited with the INR (domestic currency) equivalent of the foreign exchange purchased by the central bank (RBI), and the banks’ foreign assets decline, that is the banks’ USD balances held in their _Nostro accounts_ with foreign correspondent banks decline. Thus reserve money increases, which normally causes an expansion of the money supply. The accretion to reserves is recorded under the Banking Department’s foreign assets. 1. RM $=$ Currency in Circulation $+$ Bankers Deposits with RBI $\uparrow$ $+$ Other Deposits with RBI 2. RM = NCB $+$ NFA $\uparrow$ $+$ NDA + Coins - Net Non-Monetary Liabilities 9. Thus swaps are also used to manage foreign exchange reserves, and stimulate domestic financial markets. 10. So the multiple intent/outcomes are: 1. increases rupee liquidity in the banking system without buying G-secs and pushing the spot USDINR rate or reducing the policy rates, 2. RBI provides forward cover to the banks, encouraging capital flows, 3. RBI thus gains foreign exchange for the tenor of swap 11. RBI's forward liabilities - The swap increased RBI's forward short positions (forward liabilities). 12. ==[[RBI_Annual Report_2019.pdf#page=121&selection=83,0,85,28|March 2019]] - RBI used forex swap auctions for the first time as an instrument to manage durable liquidity, and thus expanded its liquidity management toolkit.== 13. The first buy/sell swap auction to manage (inject) rupee liquidity for longer duration (durable) was held on March 26, 2019. 14. Here the word "durable" has not bee defined by the RBI in quantitative terms. 15. **March 13, 2019** 1. The Reserve Bank conducted two USD/INR buy/sell swaps with Authorised Dealers (ADs) – Category 1 banks with the notified amount of US$ 5 billion each for tenor of 3 years on March 26 and April 23, 2019. 2. Response to the auction - The bids received in the two auctions, at US$ 16.3 billion and US$ 18.7 billion, respectively, amounted to more than three times the notified amount of US$ 5 billion. 3. Result of the auction - The Reserve Bank accepted US$ 5 billion in each of the auctions at the cut-off premium (forward points) of ₹7.76 and ₹8.38, respectively, and simultaneously injected ₹345.6 billion and ₹348.7 billion into the banking system. 16. ==The [[Forex Markets#^366c1f|cash/tom rates]] fell (reflecting a lower FX-swap implied rupee interest rate) as banks rushed to supply the dollars to RBI. Also, the USDINR forward rate fell along with [[Modified MIFOR|MIFOR]] rate. The offshore NDF rates also fell as the onshore USDINR forward rates fell.== 17. The forex swap implied rupee interest rate, derived from the cut-off forward points and US dollar borrowing rate (US TREASURY NOTE yields which represents the return on the dollar assets acquired by RBI) is usually lower than the domestic interest rate, which is to incentivize the banks to swap the dollar with RBI. 1. The banks will compare the forex swap implied rupee interest rate with the rupee rate implied by the market-based USD funding rates like (LIBOR/SOFR) and USDINR forward rate to evaluate the relative attractiveness. 2. The initial (1st leg) exchange rate = Reference rate of USDINR on the day of the first leg of USDINR 3. The terminal (second leg) exchange rate = announced in the results of auction 4. The difference gives the forward premia (in points/paise or %) 5. The US dollar borrowing rate can be the US Treasury Note yield for that period. 6. The forex swap implied rupee interest rate can be calculated using the covered interest rate parity formula. 18. **Buy/Sell USD-INR Swap Auctions (Examples)** 1. [March 13, 2019](RBI_Press%20Release_20190313_RBI%20to%20inject%20Rupee%20liquidity%20through%20long%20term%20USDINR%20BuySell%20Swap%20auction.pdf) 2. [Apr 01, 2019](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=46698) 3. [January 28, 2025](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=59623) 4. [Feb 21, 2025](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=59819) 5. [Mar 10, 2025](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=59942) 6. [December 08, 2025](RBI_Press%20Release_20251208_RBI%20to%20inject%20liquidity%20through%20long%20term%20USDINR%20Buy-Sell%20Swap%20auction.pdf) 7. [Dec 24, 2025](RBI_Press%20Release_20251224_RBI%20to%20inject%20liquidity%20through%20long%20term%20USDINR%20Buy-Sell%20Swap%20auction.pdf) 8. [Jan 27, 2026](RBI_Press%20Release_20260127_RBI%20to%20inject%20liquidity%20through%20long%20term%20USDINR%20Buy-Sell%20Swap%20auction.pdf) 19. ==**September 2013** - The [[Forex-Special Swap Window - FCNR (B) Deposits (2013)|Buy/Sell USDINR swap window to attract FCNR (B) deposits]] was conducted to increase forex reserves. It was not an auction but all eligible banks could sell dollars to RBI and return rupee funds along with "pre-announced forward premium" to get the US dollars back. The impact on balance sheet was just like any other buy/sell swap but it was conducted at pre-determined rate as the motive was not to inject rupee liquidity at the highest possible forward premium. == 1. Here the swap was intended as a money market tool; nonetheless, it still has the (temporary) expansionary effect on reserve money. ### USDINR Sell/Buy Swap 1. They are used to: 1. supply dollars in the foreign exchange market, or 1. In the first leg of the transaction, the bank will buy US Dollars from the Reserve Bank at FBIL Reference Rate of the auction date. The settlement of the first leg of the swap will take place on spot basis from the date of transaction and the Reserve Bank will debit the Rupee funds from the current account of the successful bidder and the bidder will receive US Dollars into its nostro account held with the correspondent bank. 2. Banks that bid with lower forward points as they are ready to sell cheaper forward dollar are more likely to get accepted in the bids, while bids quoting higher forward points get rejected. 3. Reserve Money - As the central bank credits the banks' nostro accounts with US dollars and receives the domestic currency equivalent, the reserve money decreases tightening the money market. 4. In the reverse (second/forward) leg of the swap transaction, US Dollars will have to be returned to the Reserve Bank, to get the Rupee funds back including the swap premium. 5. In some circumstances, this swap can also be used to absorb domestic rupee liquidity. In other words, forex reserves can act as a tool for domestic liquidity management through SELL/BUY USDINR swaps 2. to smoothen the receivables relating to forward assets and thereby elongate the maturity profile of its forward book 1. Managing forward book - Another reason for Sell/Buy Swap is they help RBI to rollover forward purchase of US dollar against the INR, and thus elongate the maturity profile of its forward book. Whatever RBI receives with maturity of a forward dollar purchase is sold (put) back to (into) the market with a roll-over. This ensures there is no "chunky" dollar liquidity absorption or (no tightness in onshore dollar liquidity). 3. Few USDINR Sell-Buy Swap Auctions: 1. ==[A short note on Sell/Buy Swap (March 12, 2020)](Sell-Buy%20Swap%20(March%2012,%202020).md)== 2. [March 16, 2020](RBI_Press%20Release_20200316_%20RBI%20Announces%20USDINR%20Sell%20Buy%20Swap.pdf) 3. [February 21, 2022](RBI_Press%20Release_20220221_RBI%20Announces%20USDINR%202-year%20Sell%20Buy%20Swap%20Auction.pdf) 4. [Aug 18, 2013](https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29423) - a *special swap window* for oil marketing companies (OMCs), as in 2013, have also been undertaken to directly provide dollars to them. > ==[[RBI_Annual Report_2019.pdf#page=121&selection=83,0,85,28|Forex Swaps by Central Banks]] in the Annual Report 2019.== [^1] ## Related Notes 1. [[Forex-Special Swap Window - FCNR (B) Deposits (2013)]] 2. [Sell-Buy Swap (March 12, 2020)](Sell-Buy%20Swap%20(March%2012,%202020).md) 3. Other instruments of Durable Liquidity 1. [Long-Term Repo Operations (LTROs)](Long-Term%20Repo%20Operations%20(LTROs).md) & Long term reverse repos (LTRR) 2. [Open Market Operations (OMOs)](Open%20Market%20Operations%20(OMOs).md) 4. Instruments to manage short-term liquidity with banks 1. [[Liquidity Adjustment Facility (LAF)]] - lending and borrowing with the banks through repo/reverse repos 1. [Standing Deposit Facility (SDF), 2018](Standing%20Deposit%20Facility%20(SDF),%202018.md) 2. [Marginal Standing Facility (MSF), 2011](Marginal%20Standing%20Facility%20(MSF),%202011.md) 2. [Standing Liquidity Facility (SLF)](Money%20Market%20Operations%20(MMO).md#D.%20Standing%20Liquidity%20Facility%20(SLF)) 5. Swaps between Central Banks 1. [[Bilateral, Multilateral Swaps, LoC, Liquidity Arrangements]] 2. [[SAARC Currency Swap Arrangement]] 3. [[Bilateral Swap Arrangement with Japan]] ## References ### [[Publications (Data Releases) & Research#Publications|Publications]] 1. RBI. Annual Report 2018-19. [[RBI_Annual Report_2019.pdf|pdf]] ### Others 1. Eichengreen, B. (1998). _The gold standard and related regimes: Collected essays_. In M. D. Bordo & B. Eichengreen (Eds.), _Financial markets and financial crises_ (Chap. 5). International Monetary Fund. [Link](https://www.elibrary.imf.org/display/book/9781557755988/ch005.xml) 2. Catharina J. Hooyman. (1997, Sept. 7). ==Use of Foreign Exchange Swaps by Central Banks==._ In _Instruments of Monetary Management_ (Chapter 5). IMF eLibrary. [Link](https://www.elibrary.imf.org/display/book/9781557755988/ch005.xml) | [pdf](Catharina%20H_1993_Use%20of%20Foreign%20Exchange%20Swaps%20by%20Central%20Banks.pdf) [^1]: Box V.2 titled The USD/INR Buy/Sell Swap: A New Armour in RBI’s Liquidity Management Toolkit in the [[RBI_Annual Report_2019.pdf|Annual Report 2018-19]].