RBI swaps push dollar-rupee hedging to two-month low

The Reserve Bank of India’s buy-sell dollar/rupee swap operations over the past 10 days reduced one‑year hedging costs to their lowest level in two months and coincided with a recovery in the rupee ahead of a scheduled monetary policy decision on Friday.

One‑year forward premia fell from a mid‑May peak of about 3.50% to roughly 2.92%. Over the same period the spot rupee strengthened from a recent record low of 96.96 per US dollar to as strong as 94.7275, then traded around 95.6875 by Thursday.

Bankers and traders estimated the central bank’s swap activity at the lower end of around $2 billion over the 10‑day span, though estimates varied. Market participants reported most transactions were concentrated in the 12‑ to 18‑month segment, a shift from the RBI’s typical use of swaps with maturities under one year.

A currency trader at a mid‑sized private bank described the central bank’s participation in the swap market as markedly different from its earlier approach. A treasury official at a large private bank suggested the engineered fall in forward premiums could be connected to measures the RBI might announce at the policy review. An economist at a private bank noted that longer‑dated swaps give the RBI greater flexibility in managing its expanding forward book.

Buy‑sell swaps are designed to neutralize the liquidity impact of spot dollar sales. Bankers said the swap operations have not fully offset those effects, prompting the RBI to continue injecting funds into the banking system through variable rate repo operations to maintain adequate liquidity.

Two‑year forward points fell by more than one rupee from recent highs, reflecting reduced forward premia across the curve after the central bank stepped up activity in longer‑tenor swaps. Market participants are watching whether the RBI will announce additional measures to boost dollar inflows and support the currency.

Markets expect the RBI to keep interest rates unchanged on Friday. The rupee has fallen about 6.5% so far this year, a decline market participants attribute to an oil price shock linked to the Iran conflict and to foreign equity outflows.

All bankers and market participants cited in this report spoke on condition of anonymity because they were not authorised to speak publicly. Traders and banks continue to monitor the central bank’s next actions as authorities balance exchange‑rate pressures with domestic liquidity and monetary policy considerations.