The Reserve Bank of India (RBI) is likely using short-dated dollar-rupee swaps to pull cash out of the banking system after a record surge in overseas deposits flooded banks with rupees, Reuters reported, citing bankers and foreign-exchange brokers.

The reported transactions come after the RBI has already stepped up its publicly disclosed efforts to absorb excess liquidity through reverse repos.

The RBI launched a special dollar-rupee swap facility on 8 June to attract foreign currency through Foreign Currency Non-Resident Bank, or FCNR(B) deposits, overseas foreign-currency borrowings and external commercial borrowings.

By 31 August, banks had brought in a provisional $136.377 billion through the facility, according to the RBI. FCNR(B) deposits accounted for $127.226 billion, while overseas foreign-currency borrowings contributed $5.26 billion and external commercial borrowings $3.891 billion.

The scale was far larger than expected and created a second problem for the RBI. When banks swapped the foreign currency with the central bank, they received rupees in return, sharply increasing the amount of cash in the domestic financial system.

The RBI has since been trying to pull much of that liquidity back out. On 7 September, it offered banks a 30-day variable-rate reverse repo (VRRR) worth ₹7 trillion, or about $74 billion, with an unusual early-redemption option intended to give banks more flexibility.

Banks offered only ₹2.593 trillion, and the RBI accepted the full amount at 5.24%, official auction data show.

The central bank followed with a ₹5 trillion overnight reverse-repo auction the same day, accepting ₹3.534 trillion. It absorbed another ₹4.176 trillion through an overnight auction on 8 September and ₹4.616 trillion on 9 September.

RBI money-market data for 8 September showed net liquidity absorption of about ₹10.49 trillion, or roughly $110 billion, across its current and outstanding operations. The weighted average call-money rate was 4.98%, below the RBI’s 5.25% policy repo rate, illustrating the downward pressure that abundant cash is putting on short-term rates.

The RBI did not comment on the reported operations.

In a sell-buy swap, the RBI sells dollars in the spot market and receives rupees, immediately removing rupee liquidity from the banking system. It agrees at the same time to buy the dollars back later, meaning the liquidity effect reverses when the transaction matures.

That makes the swaps a temporary way of dealing with the cash glut without locking banks into longer reverse-repo operations. They could also help the RBI manage its unusually large foreign-exchange forward position.

RBI data for July showed net forward dollar liabilities of about $137 billion. Around $47.6 billion was in contracts due within one year, central-bank data showed.

The forward position has grown sharply because of the same special foreign-currency program that generated the liquidity surge. The RBI receives dollars and supplies rupees under the longer-term swaps, while committing to reverse those transactions in the future.

Near-term sell-buy swaps can offset some of those positions as contracts mature, although the RBI has not said publicly that reducing its forward book is the purpose of the reported operations.

Rupee comes under fresh pressure

The liquidity operation is also taking place as the rupee again faces pressure from higher oil prices and renewed geopolitical tensions. The currency weakened past 95 to the dollar on Wednesday and closed at 95.1050, while Brent crude moved above $100 a barrel. India imports most of the crude oil it consumes, leaving the currency sensitive to sharp increases in oil prices and the resulting demand for dollars from importers.

Selling dollars in the spot leg of the reported swaps adds dollar supply to the market while removing rupees. But the RBI has not publicly said that supporting the currency is an objective of these transactions, and the effect reverses when the swaps mature. The immediate policy problem remains the scale of excess cash.

The RBI’s first 30-day reverse-repo auction attracted only ₹2.593 trillion against the ₹7 trillion offered, suggesting banks remain reluctant to lock away large sums for longer periods even when given an early-exit option. The central bank has compensated with repeated overnight operations. Its 9 September auction attracted ₹4.616 trillion of bids against ₹5 trillion offered, all of which were accepted.

The June foreign-currency program strengthened India’s external buffers by bringing in more than $136 billion. But converting most of those dollars into rupees has left the RBI managing the domestic consequence of that success. For now, that means using reverse repos and, according to market participants, short-dated foreign-exchange swaps to keep the banking system’s cash surplus from pulling short-term interest rates too far below its policy setting.