The Reserve Bank of India (India’s central bank) plans the operation to inject rupee liquidity by taking U.S. dollars from banks and returning them after three years for rupees plus a premium.
The Reserve Bank of India (India’s central bank) is set to conduct a $5 billion USD/INR swap auction on May 26 to boost liquidity in the banking system. In this type of foreign-exchange swap, banks sell U.S. dollars to the central bank and receive Indian rupees in return, giving them more local-currency funds that can be used for lending. After three years, the transaction unwinds: banks return the rupees plus a small premium and receive their dollars back. Such operations are commonly used by central banks to manage short-term liquidity conditions without making a permanent change to foreign-exchange reserves.