Rupee Crashes Past 90! RBI's $5 Billion Liquidity Move Explained: Will Volatility Persist?

The Reserve Bank of India (RBI) has conducted a significant $5 billion USD/INR Buy/Sell swap auction. However, RBI Governor Sanjay Malhotra clarified that this operation's primary goal is to inject liquidity into the banking system, rather than directly managing the Indian rupee's exchange rate volatility.

RBI's Liquidity Management Focus

• The central bank announced the USD/INR Buy/Sell Swap auction on December 16th as part of its December monetary policy announcement.
• The stated objective is to inject durable liquidity into the Indian banking system.
• According to expert estimates, this auction is expected to inject approximately ₹45,000 crore into the banking system.
• This liquidity injection is anticipated to ease interest rates on overnight instruments and improve the transmission of any previous repo rate cuts by the RBI.

Rupee Faces Persistent Depreciation

• The Indian rupee recently touched an all-time low, crossing the 90 mark against the US dollar.
• This depreciation is primarily attributed to sustained equity outflows from foreign investors and uncertainty surrounding potential India-US trade deals.
• Despite the rupee hitting record lows, the RBI's direct intervention to stem its fall has been observed as muted, contributing to the ongoing depreciation.
• Data indicates that the Indian rupee depreciated by 4.87 percent between December 31, 2024, and December 5, 2025.
• During this period, it has become the worst-performing currency among major Asian peers, surpassed only by the Indonesian Rupiah, which depreciated by 3.26 percent.

Market Reaction and Governor's Stance

• The market's reaction to the swap announcement was notably subdued, underscoring the limited impact on curbing volatility.
• The spot rupee, which had experienced some strengthening earlier in the day, quickly surrendered all its gains.
• Forward premia for 1-year and 3-year tenors initially fell by 10–15 paise but later rebounded as traders positioned for continued pressure on the currency.
• RBI Governor Sanjay Malhotra reiterated the central bank's long-standing policy to allow markets to determine currency prices, emphasizing market efficiency in the long run.
• He added that the RBI's continuous endeavor is to reduce any abnormal or excessive volatility, rather than managing a specific exchange rate level.

Impact

• The persistent volatility of the Indian rupee can lead to increased import costs for Indian businesses, potentially contributing to higher inflation.
• It may also influence foreign portfolio investment decisions due to heightened currency risk.
• Conversely, the liquidity injection is intended to support domestic credit growth and broader economic activity.
• Impact Rating: 7/10

Difficult Terms Explained

• USD/INR Buy/Sell Swap Auction: A foreign exchange operation conducted by the central bank where it sells dollars and buys rupees in the spot market and commits to buying dollars back and selling rupees at a future date, primarily to manage banking system liquidity.
• Liquidity: The availability of cash or easily convertible assets in the banking system, crucial for smooth financial operations.
• Forward Premia: The difference between the forward exchange rate and the spot exchange rate for a currency pair, reflecting market expectations of future currency movements and interest rate differentials.
• Monetary Policy: The actions undertaken by a central bank, like the RBI, to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• CPI Inflation: Consumer Price Index inflation, a key measure of inflation that tracks the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.