RBI’s $5 billion currency will sail through, high hedging costs cloud corporate appetite

The Reserve Bank of India’s three-year dollar-rupee swap is expected to be fully subscribed, although bankers say a rise in hedging costs is likely to limit corporate participation.

The RBI’s dollar-rupee swap will absorb $5 billion from the market and inject an equivalent amount of rupees, as part of the central bank’s efforts to ensure sufficient liquidity in the banking system to support the transmission of interest rate cuts, with the transaction reversed after three years.

Bankers expect demand will be sufficient to fully subscribe to the auction. However, the increase in hedging costs is likely to mean that corporate interest will be much more subdued than in March’s larger, comparable operation.

When the RBI last executed a three-year $10 billion swap in March, the three-year forward points on the auction date were around ₹6. They have since risen to just under ₹8, hitting an over two-and-a-half year high last week.

For importers, higher forward points translate into higher costs of hedging future dollar debt.

The swap auction is expected to be fully subscribed, supported by excess dollar liquidity in the banking system, said Sameer Karyatt, DBS Bank India executive director and head of trading.

However, given the “prevailing market dynamics”, characterized by higher hedging costs for importers, he does not expect “significant interest” from companies.

A senior banker at a mid-sized private sector bank agreed with Karyatt, saying business “enthusiasm” is expected to be lower this time and that he has advised his clients against bidding in the auction.

The banker expects the bidding to be “less competitive”, with the auction close likely to be “at least” 15-25 paisa below the prevailing market level.

Three-year forward premiums were quoted at ₹8.02/8.18 on Monday.

“There is little doubt that the full $5 billion will be withdrawn, the real focus is where the line is pushed,” said a forex swap trader at a bank.

This will be the RBI’s third three-year swap auction this year, which will allow the RBI to manage about $25 billion by 2028.

The swap comes amid continued pressure on the rupee, with the currency falling to an all-time low of 90.7850 per dollar on Monday. Bankers said the weakness is likely to further limit corporate participation.

Published on December 15, 2025