RBI dollar swaps: Into the unknown

Compared to standard liquidity management tools that are usually profitable, RBI takes on considerable macro risk with the swaps

The Reserve Bank of India (RBI) has been the cynosure of media attention recently and financial commentators have heaped high praise on it for “innovative” liquidity management through a highly successful dollar swap auction. Emboldened by the response, the venerable central bank has now announced a second tranche to be auctioned today (April 23). Normally, one expects little attention to be given to routine liquidity operations of central banks but RBI’s actions are neither routine nor limited to purely liquidity management. Under the innocuous wording of dollar swaps hides an exotic beast rarely seen even in the densest jungles of