Simply Put: USD/INR Buy/Sell Swap

After years in the arts, Jay is preparing for a shift. Not just of roles, but of industry itself. The destination this time is public service. As he gears up for the move, he realises that understanding economics is unavoidable. While scanning the headlines, one term stops him in his tracks: RBI’s dollar-rupee forex swap. Puzzled, Jay does what most of us would do: Ring his friend Jeet to make sense of it.

Jay: I see this headline in businessline which says the RBI has come up with a three-year $10 billion dollar/rupee swap. Why?

Jeet: If RBI feels not enough liquidity is available in the banking system, they come up with such measures. If you remember, on December 23, 2025, the RBI announced measures to inject liquidity, including a forex swap.

Jay: Can you elaborate?

Jeet: The name of the swap itself tells the story. A $10 billion dollar/rupee buy/sell swap means the RBI will buy dollars worth $10 billion from commercial banks and give them an equivalent amount in rupees.

Jay: What does the three-year tenure mean?

Jeet: The dollars that commercial banks sell to the RBI will be returned to them after exactly three years. Before getting into details, you must know the three key dates for RBI swaps.

Jay: Well, tell me what they are.

Jeet: First is the auction day, when commercial banks bid for the swap to access rupee from the RBI. Second is the spot-leg (also called the first-leg or near-leg) day, when the actual transaction of the RBI buying dollar and selling rupee takes place. The third is the forward leg (also called the second-leg or far-leg), when the spot-leg transaction is reversed. That is, the RBI sells dollars back and receives rupee from commercial banks.

Jay: Got it! How will the exchange rate be decided for these transactions?

Jeet: Basically, there are two legs of transactions. One is the spot-leg, which happened on January 16, 2026. This is when the RBI bought $10 billion from commercial banks. The exchange rate for this leg was the FBIL (Financial Benchmarks India Private Ltd) reference rate on the auction day.

Jay: Now I have a couple of doubts. What really happens at the auction? And how is the exchange rate for the forward leg decided?

Jeet: The auction is precisely about deciding the exchange rate for the forward leg.

Jay: Meaning?

Jeet: Participation in the swap is not compulsory for all commercial banks. Those who wish to participate bid the premium at the auction, which represents the additional rupee they agree to pay over the auction-day exchange rate to buy back dollars from the RBI on the forward-leg settlement date.

Jay: Okay, here is what I understand. January 13, 2026, was the auction day and the resulting premium (i.e., the cut-off premium) was 728 paise (₹7.28) based on the bids. On January 16, 2026, the RBI bought $10 billion from banks and sold them an equivalent amount of rupees. The exchange rate used was the FBIL reference rate on the auction day, which was 90.2677. Three years later, on January 16, 2029, the RBI will sell $10 billion back to the banks and buy an equivalent amount of rupees. The exchange rate then will be the auction-day rate plus the premium, which comes to 97.5477 (90.2677 plus 728 paise).

Jeet: Spot on, mate!

Jay: So, by buying dollars and selling rupees to commercial banks, more rupee is injected into the system and becomes available for lending. But won’t this put pressure on the rupee, which is already weak? After all, the RBI is buying dollars.

Jeet: In the short term, yes it might. But this alone cannot weaken it in the long term. Because the RBI’s dollar purchase is temporary and the same dollars will be sold back to banks in the forward leg. By committing upfront to selling dollars in the forward market, the RBI also signals that this is only a liquidity operation, not a directional move against the rupee.

Jay: That makes sense. After all, the very need for additional liquidity suggests there isn’t enough rupee in the system. In that context, it shouldn’t really weigh on the currency.

Jeet: Exactly. And remember, if the RBI later feels there is excess liquidity, it can do the reverse. That is, a dollar/rupee sell/buy swap where the central bank sells dollars to commercial banks and absorbs rupees from the system.

Published on January 17, 2026