India central bank likely deploys FX swaps to mop up overseas deposit-driven liquidity, traders say

Business Recorder reported that India's central bank is probably running near-maturity dollar/rupee sell-buy swaps to soak up excess rupee cash that arose from deposits lenders gathered overseas. Seven bankers said so, and four of them, along with two FX brokers, pointed to a September maturity. Two of the banker sources added that the central bank is also likely running swaps that mature in October.

Traders reported that September and October forward premiums rose by about 2.5 paisa and 4 paisa, lifting premiums across other tenors too. Under a swap, the central bank hands over dollars at the prevailing spot price in return for rupees, which drains liquidity from the banking system until the deal reverses at maturity.

The activity follows a weak response to the central bank's 30-day VRRR operation earlier this week, while lenders have gathered roughly $128 billion through deposits from non-resident Indians, well above first projections. Gaura Sen Gupta, chief economist at IDFC FIRST Bank, estimated the core liquidity surplus at 14 trillion to 15 trillion rupees ($147.26 billion to $157.78 billion) and said the RBI plans to pull out roughly 7 trillion rupees through other instruments.