Volatile rupee shifts spotlight on banking system liquidity

Indian Rupee

• RBI has ample forex reserves to buffer rupee volatility
• RBI uses tools like FX swaps and OMOs to maintain liquidity
• Experts expect RBI to keep intervening to stabilise the rupee

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India has ample liquidity to buffer the rupee against near-term volatility, with experts saying the Reserve Bank of India has the forex reserves and policy tools necessary to prevent a sharp depreciation in the currency, as the West Asia conflict entered its sixth day on March 5.

The rupee sank to a new low on March 4 when it slipped below the 92-dollar mark. Elevated crude prices, which have surpassed the $80 a barrel mark after the war began on February 28, have put pressure on most emerging economies, including India, a net oil importer.

On March 5, the rupee ended at 91.60. The RBI likely intervened in the spot and offshore forwards markets to stymie any free-fall in the rupee, traders said.

“We anticipate continued depreciation pressure on the INR. The RBI is expected to intervene to mitigate excessive volatility and sterilise these actions to maintain INR surplus liquidity within the system,” Sameer Karyatt, executive director and head of trading at DBS Bank India, said.

According to the latest RBI data, system liquidity has remained in surplus since the beginning of the year and currently stands at Rs 2.10 lakh crore.

The rupee’s downward spiral can be stemmed by various liquidity management tools, experts said.

The liquidity is underpinned by healthy forex reserves, which stood at $723.08 billion as of February 20. Despite a $2 billion drawdown over the previous fortnight, experts say the reserves are enough to weather rupee volatility.

Liquidity injection

The central bank has been bolstering liquidity through targeted measures, including Open Market Operations (OMO) and a specialised USD/INR buy-sell swap auction.

It pumped in about Rs 2 lakh crore in the system in four tranches during December and January. In January, it also announced a $10 billion USD/INR buy-sell swap with a three-year tenor.

In a buy-sell swap, which is a liquidity management tool, the RBI purchases dollars from banks to infuse immediate rupee liquidity and simultaneously agrees to sell the currency back at a pre-determined premium at the end of the tenor.

The RBI has a fair amount of tools at its disposal right now when it comes to mitigating excessive pressures. “The RBI is committed to maintaining liquidity. So, we have seen them regularly announcing FX swaps, the variable rate repo operations, etc,” Lavanya Venkateswaran, a senior economist with OCBC Bank, said.

The RBI has also cut interest rates since February 2025 by a cumulative 125 basis points (bps). The repo rate stands at 5.25 percent and there are no signs, so far, of an interest rate cut.

Governor Sanjay Malhotra recently indicated that the weighted average call rate has moved below the policy rate.

The RBI, however, will be cautious as the rupee remains vulnerable to global factors. Experts expect the central bank to continue with its balancing act of intervening in the market to stabilise the currency while ensuring that systemic liquidity remains supportive.