The Reserve Bank of India (RBI) on Friday announced a $10 billion buy/sell swap for a tenure of three years. The auction will be conducted on February 28.

       “In order to meet the durable liquidity needs of the system, the Reserve Bank has decided to inject Rupee liquidity for longer duration through long-term USD/INR Buy/Sell swap,” RBI said on Friday.

       This will be the second swap auction by the central bank after it infused $5 billion via six months swap on January 31.

       “The first swap was of $5 billion, and now they have announced a $10 billion swap. They could have announced a large amount in the first auction itself. But I think they are also analysing the flows. These are durable liquidity infusions. But they are very proactive. We might see more infusion,” said Neeraj Gambhir, Treasury, Markets & Wholesale Banking Products of Axis Bank.

       The RBI has injected over ？3.6 trillion of durable liquidity into the banking system so far through a combination of OMO purchases, FX swaps, and longer-duration variable rate repo auctions.

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       The RBI has purchased ？1 trillion of government securities so far via OMO auctions. The central bank also conducted screen-based OMOs, buying ？58,875 crore worth of securities during January. In addition, the central bank also intervened in the government securities market, acquiring ？39,000 crore worth of bonds in the secondary market.

       Despite this, the banking system has been in a net liquidity deficit for the past ten consecutive weeks. As of Thursday, the liquidity deficit stood at ？1.87 trillion, according to the latest RBI data.

       This liquidity shortfall has primarily stemmed from the RBI’s aggressive interventions in the foreign exchange market, said market participants.

       India’s foreign exchange reserves dropped by $2.5 billion to $635 billion during the week ending February 14, largely due to a decline in foreign currency assets, which fell by $4.5 billion during the period. Foreign exchanges are down by almost $70 billion from the peak of $705 billion reached at the end of September.

       On Friday, the rupee weakened against the dollar due to dollar demand among importers, and foreign investors withdrew from domestic markets, according to market dealers. The rupee depreciated by 5 paisa against the dollar, closing at 86.71 per dollar, compared to 86.66 on Thursday.

       The local currency appreciated up to 86.48 per dollar during the day tracking its Asian peers.

       Meanwhile, the dollar index was steady at 106.6 on Friday. The index measures the strength of the U.S. dollar against a basket of six major currencies.

       “The equities were down and month end dollar demand was there. We opened with a gap, but again settled near yesterday’s closing,” said a dealer at a state-owned bank.

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