The Reserve Bank of India’s decision to conduct a $10 billion buy-and-sell swap with a three-year tenure is an unusual move, raising questions about its broader objectives. The stated rationale is straightforward—easing interbank liquidity—but the mechanics suggest a deeper strategic play of replenishing foreign exchange reserves.A spot-forward swap is a well-known tool, yet its use by the RBIin this context warrants closer scrutiny. The central bank will buy dollars now and commit to selling them three years later. This immediately infuses rupee liquidity into the system, potentially easing tight money market conditions. However, whether liquidity infusion is the primary intent or merely a convenient byproduct remains debatable.
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