The Reserve Bank of India (RBI) appears to be conducting near-term dollar-selling, rupee-buying swaps to absorb excess rupee liquidity arising from domestic banks' acceptance of overseas deposits. According to banking sources, the central bank has conducted swaps maturing in September and is likely to have also conducted swaps maturing in October. Traders said this has led to a rise in forward premiums for September and October contracts, with the increase spilling over to other tenors. Two other banking sources estimated that the central bank conducted swaps totaling about $700 million across both maturities. Banks have seen a surge in dollar deposits from non-resident Indians, which are converted into rupees at no cost through swaps with the central bank, leaving the banking system awash with rupee liquidity. IDFC First Bank's chief economist, Gaura Sen Gupta, estimated that core liquidity surplus peaked at 14-15 trillion rupees ($147.26 billion-$157.78 billion) and expects the central bank to aim to absorb about 7 trillion rupees through tools such as variable rate reverse repos (VRRR).
RBI conducting dollar-selling/rupee-buying swaps to absorb excess rupee liquidity supports the rupee (weakens USD/INR).
