Ending cash crunch with $10 billion liquidity infusion

Reserve Bank of India (RBI) is coming up with its foreign exchange swap worth $10 billion to inject liquidity into the banking sector and the overall economy. The banking sector has been under a cash crunch for a long and this measure is to curb the cash crunch. The central bank of the country will be holding a three-year swap auction on Friday, 28 February 2025 

How will it work?

RBI with foreign exchange swaps will be buying dollars from banking institutes against the Indian currency – Rupee, and contract to sell the dollars at a specified date in the future. Now when RBI purchases dollars, it brings an equivalent amount of rupee liquidity in the economy. This helps in bringing down the short-term rates by adding more liquidity to the banking system. This liquidity injection has come at the right time, as this is right before the financial year ends, and the banks need a lot of cash requirements during this time. 

Second in a row

Last month, RBI came up with a massive liquidity injection of $5 billion and now this $10 billion is huge for the overall market and especially the banking sector. While the previous one was a six-month swap this one is a three-month swap. 

To shield the Indian Rupee from dropping further mainly after Trump’s significant move towards imposing tariffs. RBI sold dollars significantly to protect the rupee from this massive volatility. 

Apart from forex swaps, RBI has also started open market bond purchases and long-term variable repo auctions and all these are related to curbing the cash crunch in the banking sector. 

RBI needs to push more as liquidity is a true concern and even the longest-awaited rate cut couldn’t dig much into the economy due to less liquidity in the market. 

Source: Economictimes

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