In the current calendar year so far, the rupee has weakened about 5 percent or 426 paise against the dollar | Photo credit: LeoWolfert
They believe the central bank may have followed the above-mentioned strategy to stabilize the rupee, which rose above the psychologically crucial 90 mark against the dollar last week.
The rupee appreciated around 20 paise on Tuesday to close at 89.8750 per dollar against the previous close of 90.07, amid a weak dollar, falling crude oil prices and unwinding of long dollar positions.
In the current calendar year so far, the rupee has weakened about 5 percent or 426 paise against the dollar.
V Rama Chandra Reddy, Head – Treasury, Karur Vysya Bank, said, “When the RBI will conduct the three-year dollar/rupee Buy/Sell swap auction for $5 billion, it will buy dollars on the spot and do the reverse (sell) in the forward segment in the three-year segment.
“This move will increase the firepower of the central bank to intervene on the ground without reducing foreign exchange reserves. So the overall impact is that without disrupting the liquidity of the rupee, the RBI can intervene in the spot segment of the dollar and the rupee,” he added.
In the current calendar year, India’s foreign exchange reserves have fallen by $28.136 billion to $686.227 billion as of November 28.e.
Swap: a strategic move
Amit Pabari, MD, CR Forex Advisors, noted that at first glance, the RBI’s latest policy mix – a 25 basis points (bps) rate cut, ₹1 lakh crore OMO (open market operation) purchase of government bonds and a three-year dollar/rupee buy/sell swap worth $5 billion – appears rupee negative.
Lower interest rates and additional liquidity in the rupee usually weaken a currency. But the intent behind the swap is more strategic than it seems, he said.
A buy/sell swap is essentially a liquidity instrument: the RBI buys dollars in the spot market (by injecting rupees today) and commits to selling those dollars back at a future date. This temporarily increases the liquidity of the rupee, similar to OMO purchases.
Pabari said, “The question is, why do this when the rupee is already under pressure?
For that, it helps to look back to early 2025, when the rupee faced a remarkably similar environment. Global uncertainty had increased after US President Donald Trump threatened broad ‘reciprocal tariffs’, pushing investors into the dollar and driving the rupee to record lows.
“Despite these pressures, the RBI cut rates and continued large-scale liquidity measures – including nearly $25 billion in buy-sell swaps between January and March 2025.”
While conventional logic says that injecting so much liquidity would further weaken the rupee, the opposite happened.
“The additional liquidity in the rupee created room for the RBI to intervene more flexibly in the spot market, selling dollars when the rupee came under sharp pressure. This helped control volatility and gradually reversed the panic-induced weakness,” Pabari said.
Published on December 9, 2025
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