India's central bank may be conducting near-maturity sell-buy swaps in the dollar-rupee market to temporarily soak up rupee liquidity generated by a concentrated inflow of overseas deposits, according to several bankers and forex dealers.

The Reserve Bank of India has not yet made an official announcement regarding such operations, and current assessments are primarily drawn from shifts in the foreign exchange forward market and observations by market participants.

In the first leg of a sell-buy swap, the central bank sells dollars to commercial banks, withdrawing rupees from the banking system in return. Upon the swap's maturity, the central bank buys back the dollars and returns the rupees. This mechanism allows for a temporary reduction in banking system liquidity without directly selling government bonds or altering reserve requirement ratios.

Traders suggest that these swaps may be scheduled for maturity in September, with some operations potentially extending into the October tenors. Given that the central bank has not published transaction sizes, execution prices, or maturity structures, the precise scale of these operations cannot be confirmed from public information at this stage.

Short-dated forex swaps could also be coordinated with the maturity schedules of the central bank's existing forward positions, helping to mitigate the direct impact of a large-scale liquidity withdrawal on the bond market.

The liquidity glut primarily stems from a concessional swap facility previously introduced by the central bank to attract foreign exchange inflows. Indian banks, through channels such as foreign currency non-resident bank deposits, overseas foreign currency borrowings, and external commercial borrowings, had absorbed a combined total of approximately $136.377 billion as of August 31. Among this, foreign currency non-resident bank deposits contributed around $127.226 billion.

Commercial banks swap the dollars they acquire with the central bank to receive rupees, and these deposits enjoy exemptions from cash reserve ratio and statutory liquidity ratio requirements, resulting in a substantial influx of rupees into the banking system.

India's banking system liquidity surplus climbed to approximately 10.3 trillion rupees earlier in September. The average daily surplus in August stood at 3.67 trillion rupees, more than tripling from July's 1.07 trillion rupees. This excess of funds has driven overnight market rates below the policy repo rate, undermining the central bank's ability to maintain stability at the short end of the yield curve.

The reverse repo remains the primary tool publicly in use. The central bank had earlier intensified its variable rate reverse repo operations. Two three-day reverse repo auctions held on September 4 absorbed a combined 6.02 trillion rupees, yet bank bidding volumes remained below the announced operation sizes. At that time, the weighted average overnight call money rate was around 4.94%, below the 5.25% policy repo rate, while some secured overnight rates had further declined to between 4% and 4.5%.

Banks prefer participating in shorter-duration operations to avoid locking in funds for extended periods, which limits the effectiveness of reverse repos in addressing structural liquidity surpluses. Forex sell-buy swaps, therefore, could serve as a supplementary tool to reverse repos, though until the central bank discloses transaction data, the market cannot confirm whether these swaps represent a proactive policy arrangement to drain liquidity or simply part of the central bank's routine forward book management.