India will inject historic $32 billion worth of rupee liquidity into its banking system over the next month, according to the Reserve Bank of India (RBI) on Tuesday.
The central bank confirmed it will carry out open market bond purchases worth 2 trillion rupees ($22.34 billion) between December 29 and January 22, alongside a $10 billion dollar-rupee buy/sell swap scheduled for January 13.
The intervention is a response to pressure the RBI has been getting from traders and bankers, who flagged a surge in forward premiums on the dollar-rupee that needed to be brought under control.
India’s liquidity tools target excess dollar supply and weak rupee flows
With year-end regulatory constraints already tightening lending options, the bond market demanded the RBI step in and ease rupee liquidity while draining out surplus dollar inflows that have distorted pricing at the long end of the FX curve. India’s 10-year bond yield closed at 6.6328% on Tuesday.
Governor Sanjay Malhotra has already pumped 6.5 trillion rupees into the system this year through similar bond operations, more than any previous year on record. Now, it’s adding another massive round to stabilize the system before the end of the calendar year.
The $10 billion swap in January follows a $5 billion 3-year swap the RBI executed on December 16. The idea is simple: sell dollars now, buy them back later, and in the meantime, release rupees into the market. This helps reduce excess dollar liquidity without permanently selling the RBI’s foreign currency reserves.
Banks trying to manage surplus dollar holdings at the end of the quarter normally park funds with other institutions. But with quarter-end and year-end restrictions in place, this has become difficult. That’s why the RBI’s intervention has been described by traders as necessary, given the timing and the scale of market stress.
Meanwhile, India’s trade exports to the United States surged by 22.61% year-on-year in November, hitting $6.98 billion even amid economic tensions that has Russia in the middle of Delhi-Washington relations.
This is a massive rebound after two straight months of contraction, which followed the imposition of high tariffs by the United States on several Indian goods.
Imports from the U.S. also rallied by 38.29% to $5.25 billion in the same month, according to data from the Global Trade Research Initiative (GTRI), which reported a surge in bilateral trade activity, even as both economies deal with internal and external pressures.
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