The Reserve Bank of India's aggressive dollar-rupee swap operations over the past 10 days have compressed one-year FX hedging costs to 2.92%, the lowest in two months, while pulling the rupee back from its record low.
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RBI swaps drive hedging costs to 2-month low ahead of policy decision
The Reserve Bank of India's aggressive buy-sell dollar-rupee swaps over the past 10 days have compressed one-year FX hedging costs to 2.92%, the lowest in two months, ahead of Friday's monetary policy decision.
"The engineered fall in forward premiums could be linked to measures the RBI may announce," a treasury official at a large private bank said, speaking on condition of anonymity as they were not authorized to speak publicly.
One-year hedging costs have fallen from a mid-May peak of 3.50%. The rupee strengthened from a record low of 96.96 per dollar to 94.7275 before easing back to 95.6875. Market estimates of the RBI's swap activity vary, with lower-bound estimates at roughly $2 billion over the past 10 days, concentrated in the 12-to-18-month segment — a departure from the central bank's typical reliance on swaps of less than one year.
The intervention comes as the rupee has declined 6.5% this year amid an Iran war-driven oil shock that pushed crude from $72 to $126 per barrel, and foreign equity outflows that have reached 2.26 trillion rupees in the first five months of 2026. The RBI is widely expected to hold rates at Friday's decision, and the swap operations may signal additional measures to bolster dollar inflows.
Shift in Swap Strategy
The RBI's recent activity marks a notable shift in its FX swap operations, triggering a significant repricing in forwards, a currency trader at a mid-sized private-sector bank said. The central bank had previously been largely absent from this market.
The longer-tenor swaps provide the RBI flexibility in managing its expanding forward book, an economist at a private-sector bank said. Two-year forward points have declined by more than one rupee from recent peaks as a result of the concentrated operations.
The RBI's buy-sell swaps have not fully neutralized the liquidity impact of its spot FX intervention, bankers said, prompting the central bank to inject funds into the banking system through variable rate repo operations. It has conducted 10 such auctions over the last 20 trading sessions.
Rupee Under Pressure
The rupee's 6.5% decline this year makes it the fastest-falling currency in Asia, according to market data. Foreign investors withdrew more than 2.26 trillion rupees from Indian equities in the first five months of 2026, following 1.66 trillion rupees in outflows during all of 2025.
India's net foreign direct investment has also slumped, dropping to $1 billion in the 2024-25 fiscal year from $28 billion in 2022-23, reducing the dollar inflows that typically support the currency. The RBI's foreign exchange reserves stood at $681.4 billion as of late May, enough to cover about 10 months of imports.
The RBI sold $53.1 billion in the spot market during the 2025-26 fiscal year to defend the rupee, about $12 billion more than the previous year. On May 26 alone, it sold an estimated $5 billion through a single swap operation.
Friday's policy decision will be closely watched for any additional measures aimed at stabilizing the currency and attracting dollar inflows. The central bank faces the challenge of managing inflation risks from the oil shock while supporting growth in an environment of persistent capital outflows.
This article is for informational purposes only and does not constitute investment advice.
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