Impact of the Reserve Bank of India’s Liquidity Injection on the USD/INR Pair
The Reserve Bank of India’s (RBI) latest package of liquidity measures—an open‑market purchase of government securities worth ₹2 lakh crore and a $10 billion USD/INR buy‑sell swap auction—has entered the market with immediate and structural implications for the U.S. dollar–Indian rupee (USD/INR) exchange rate.
Immediate Market Reaction
On the day of the announcement, the USD/INR index fell sharply from its close of 89.57 to around 89.20 within the first trading hour, reflecting a quick influx of rupees into the market. The swap auction, which delivers U.S. dollars to banks in exchange for rupees, temporarily widened the demand for USD, thereby tightening the pair. Conversely, the substantial OMO injection of ₹2 lakh crore—equivalent to roughly $2.5 billion—provided a deep reservoir of liquidity that eased the pressure on the rupee in the longer term.
Structural Dynamics
The combination of an OMO and a dollar‑swap is designed to address two distinct facets of liquidity:
Short‑term funding – The USD/INR swap injects dollar liquidity into the banking system, allowing banks to meet foreign‑exchange requirements without having to source dollars from the open market. This reduces the immediate supply pressure on the rupee and supports the central bank’s mandate to keep the rupee from depreciating too rapidly.
Medium‑term asset quality and market depth – The OMO purchase increases the supply of government securities in the secondary market, lowering the yields on those instruments. A softer yield curve tends to reduce the cost of borrowing for banks and businesses, thereby mitigating the risk of a credit crunch that could otherwise drag the rupee lower.
The RBI’s dual approach also signals confidence in the robustness of India’s financial system. By committing to both domestic and foreign‑exchange liquidity, the central bank is effectively cushioning the economy against potential shocks—whether they arise from global dollar volatility or from domestic credit conditions.
Forward‑Looking Perspective
Currency Trend The rupee’s 52‑week high of 91.07 and low of 72.97 suggest a relatively wide range of upside and downside potential. The current close of 89.57 places the pair within the upper third of that band, indicating that short‑term volatility remains limited. However, the fresh liquidity infusion is likely to keep the rupee within a tight corridor around 88–90 for the near term, as the central bank’s policy tools are already working to counteract external pressures.
Implications for the 2026 Budget Finance Minister Nirmala Sitharaman has leveraged the liquidity boost to create fiscal flexibility for the upcoming 2026‑27 budget. A stable rupee reduces the risk of currency‑related distortions in tax receipts and in the cost of imported inputs, thereby providing a more predictable macroeconomic backdrop for new fiscal measures.
Risk Factors The primary risk to the rupee remains the persistent drift of the U.S. dollar against other major currencies. Any sharp tightening in U.S. monetary policy, or a sudden reversal of capital flows into emerging markets, could erode the gains made by the RBI’s liquidity package. In such a scenario, the rupee could test the 52‑week high of 91.07, prompting the RBI to deploy additional swap or OMO measures to maintain market stability.
Conclusion
The RBI’s coordinated OMO and USD/INR swap initiative has delivered an immediate, positive shock to the rupee while simultaneously laying a solid foundation for medium‑term stability. Market participants should monitor the trajectory of the USD/INR pair closely, as it will continue to reflect the interplay between domestic liquidity conditions and global dollar dynamics. With the central bank’s tools actively engaged, the rupee is likely to remain within a confined range, offering a degree of predictability for businesses and investors alike.
