Depreciating pressures on the rupee may be persistent  | Photo Credit: SUDERSHAN V

On Tuesday December 23, RBI announced the second major dollar/rupeee buy/sell swap auction of $10 billion to be conducted on January 13, 2026 (RBI, December 23, 2025). This is the second major liquidity injection through forex swaps in recent times, the first being conducted on December 16, 2025. How do these swaps fit in the central bank’s efforts to keep the currency stable? As the Indian rupee continues to tease the 90-mark with clear unwillingness to consolidate below the 90 level, there has been heavy intervention by the RBI in the currency all through mid-December (LSEG News; see Table).

The swap market action, referred to here, is representative of RBI’s oft-used two-pronged balancing strategy for rupee intervention. In the spot market, RBI sells dollars to arrest excessive volatility in the upward direction. This, however, sucks out rupee liquidity. To avoid the domestic repercussions of this spot market action, RBI uses swaps — committing to buy dollars now and sell dollars in the future (buy/sell dollar/rupee). The buy-dollar side infuses rupee liquidity in the present and sell-dollars side pulls-down forward market premiums by assuring availability of dollars in future. The swap announced on December 23, is the latest of the long series of forward market actions for rupee. We argue if continued intervention by RBI will help to prevent excessive volatility and depreciation in rupee? Is there a cost to intervention, even when it is balanced by forward market actions, and would it adversely impact the economy?

RBI’s role in forex market

RBI has, till date, consistently stated that it uses intervention to curb ‘excessive’ volatility but not to guide the value of the currency (Das, August 2023; Malhotra, Dec 2025). However, RBI’s role in forex markets and rupee is not without criticism. On December 19, 2023, the International Monetary Fund (IMF) noted that from December 2022 to October 2023, the rupee “moved within a very narrow range” . In recent past, again, the exchange rate has still been classified as a crawl like arrangement by IMF, suggesting “…Allowing greater exchange rate flexibility would help absorb external shocks” (IMF, 2025). Is there a cost to intervention then?

Chart 1 shows the spot and forward intervention by the central bank. While the intervention data is available only till September 2025, the broad trends are clearly visible. We see that, on both spot and forward markets, there has been heavy sales (negative purchase) of the dollar, which is not surprising given the depreciating pressure on the rupee.

Moreover, the forward market seems to be the preferred mode of intervention, as it presumably helps prevent the near-term domestic repercussions. Thus, dollar sales in the spot are matched by buy/sell swaps in the forward market. This addresses the present-day liquidity concerns, the buying of dollars leg injecting rupee liquidity (and building reserves), while postponing the sell dollar side to a future date.

Chart 2 shows this future liability build-up. The maturity breakdown of outstanding forward shows that we have a build-up of net sales on the longer term (more than a year) which are tried to be matched by shorter term contracts of varied maturity. However, the future liabilities remain and it is simply shifting the costs of intervention to a future date.

Given the present-day spot market interventions being conducted by the central bank, as well as the dollar/rupee buy/sell swaps to inject liquidity, it is not incorrect to presume a forward liability build-up at the present juncture. RBI has conducted three-year swaps in March, and December 2025 to infuse rupee liquidity and the next is planned in January 2026. Importantly, the premiums had increased to multi-year highs which have now been brought down through the swaps (Reuters, December 23, 2025).

Will depreciation stall?

Will the intervention stall depreciation? First, tariff woes and the stagnant exports remain a key concern, putting pressures on the rupee. Chart 3 shows trade balance (exports minus imports) in dollar millions has worsened in the last six months. The tariff restrictions (escalated from 25 per cent in early August to 50 per cent by end August) hit hard Indian exports to US which fell from an average of $7,296 million (January-August 2025) to $5,456 in September 2025 (https://www.commerce.gov.in/trade-statistics).

With the current stalemate on US-India trade talks, it is unlikely that Indian exports to the US will improve anytime soon. On the import side, the consistent fall in crude prices (Brent Spot) (from above $80 in January 2025 to a low of around $60 in December 2025) has helped contain the trade deficit. A rise in crude and dollar index, both at support levels, may lead to both imported inflation and depreciation of the currency.

Second, the capital flows have not been helpful for the rupee. As can be seen, FII flows (Net Portfolio Investment) have more often than not turned negative in the last one year, with sharp falls in the last three months. Finally, the interest rate differential has become squeezed for the Indian currency, given the raising of interest rates by US Federal Reserve to unprecedented levels in 2022-2023. The interest rate differential has narrowed and the premium gone up, so that capital inflows to rupee are strained. Given these factors, depreciating pressures on the rupee may be persistent, and the central bank will then require continued interventions which lead to reserve dependence, domestic liquidity repercussions and forward market liability build-up.

Should strong currency be a goal? Yes, but for that focussing on domestic growth conditions, better fiscal management, controlling inflation volatility, and diversified export growth are the way forward. Importing firms should be encouraged to hedge effectively instead of depending on the central bank for currency stability. Encouraging firms to hedge prudently, with provisions for dollar swaps for crude imports, can help ease the pressure on the central bank to maintain too strict currency stability.

Trivedi is Associate Professor, National Institute of Bank Management (NIBM); Das is ICICI Bank Chair Professor, Indian Institute of Management Ahmedabad (IIMA). Views are personal

Published on January 13, 2026