RBI forex swaps: buy/sell, sell/buy and the 2026 FCNR(B) window
Why in news: Despite about USD 143.6 billion of swap-facility inflows, the rupee neared 97 a dollar; the RBI curbed rupee derivatives on 10 October 2026.
A foreign-exchange swap is a spot currency deal tied to its reversal on a fixed later date. In a buy/sell swap the Reserve Bank of India (RBI) takes in dollars and releases rupees; a sell/buy swap drains rupees. Under the RBI's 2026 swap facility, banks reported USD 1,43,596 million of forex inflows by 18 September 2026, the RBI said.
Syllabus: GS3 · Indian Economy & Growth; Prelims · Current Affairs & IR; Prelims · Economy & Social Development
Why this matters for UPSC
GS3, Indian economy and mobilisation of resources: Prelims can ask which RBI swap injects or drains rupee liquidity and who bears the hedging cost of FCNR(B) swaps; Mains can ask how the RBI defends the rupee without spending reserves.
In short
A foreign-exchange swap pairs a spot currency deal with its reversal on a fixed later date; the RBI uses USD/INR swaps to steer liquidity and reserves.
Swaps buy the rupee time without spending reserves, but each is a promise to repay; they must stay temporary, priced and transparent.
Why it matters
A non-resident Indian with savings abroad found Indian banks eager for long dollar deposits. Banks got rupees to lend without carrying currency risk on the principal. Borrowers at home felt it as cheaper short-term money: commercial paper and certificate of deposit rates eased in August and September 2026, even as inflation climbed and the RBI began raising its policy rate. The larger issue is how a central bank defends its currency. Selling reserves runs them down; swaps bring dollars in but must be repaid at maturity, and a subsidised hedge costs the RBI instead of the banks. The rupee's slide towards 97 a dollar in October shows that inflows alone do not settle the question.
Prelims pointers
- Buy/sell swap (RBI side): injects rupee liquidity; the dollars sit in RBI reserves and in its forward liabilities for the swap's tenor.
- Sell/buy swap (RBI side): absorbs rupee liquidity; used in April 2022 to lengthen the maturity profile of the RBI's forward book.
- RBI swap auctions are multiple-price: each successful bid is accepted at its own quoted premium, in paisa.
- FCNR(B) account: a term deposit only, in a freely convertible foreign currency, for one to five years; balances are repatriable.
- Authorised Dealer: any person the RBI authorises under section 10(1) of the Foreign Exchange Management Act, 1999 to deal in foreign exchange or foreign securities; normally banks.
- Sterilisation: offsetting the rupee impact of forex intervention; the RBI Annual Report 2024-25 names open market operations as the usual tool; swaps postpone the impact.
- 2013 precedents: FCNR(B) swaps at a fixed 3.5% a year; banks' overseas borrowing limit raised from 50% to 100% of Tier I capital.
Practise a UPSC-style question
With reference to the foreign exchange swaps of the Reserve Bank of India (RBI), consider the following statements:
1. In a USD/INR buy/sell swap, the RBI sells US dollars to banks in the near leg and so absorbs rupee liquidity.
2. In a USD/INR sell/buy swap, banks buy US dollars from the RBI in the near leg and pay for them in rupees.
Which of the statements given above is/are correct?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Show the answer
Answer: (b) 2 only
Answer: (b) 2 only. Swaps are named from the RBI's side, so in a buy/sell swap the RBI buys dollars first and pays out rupees.
Statement 1: incorrect. In a buy/sell swap banks sell dollars to the RBI in the near leg and the RBI credits them rupees, which injects liquidity.
Statement 2: correct. In a sell/buy swap banks buy dollars from the RBI and the RBI debits their rupee accounts until the far leg.
Eliminate: Judge statement 1 first: in a buy/sell swap the RBI buys dollars and pays rupees, so it is incorrect. Out: (a), (c).
Eliminate: Judge statement 2: the RBI debits banks' rupees when it sells them dollars, so it is correct. Out: (d).
Trap: Reversed direction. Statement 1 turns the RBI's purchase of dollars into a sale, which flips the liquidity effect.
Remember: Buy/sell (the RBI buys dollars first) injects rupees; sell/buy (the RBI sells dollars first) drains them.
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