Definition
Currency Swap (FX Swap)
An FX swap is a simultaneous agreement to buy a currency at the spot rate and sell it back at a forward rate (or vice versa), used to manage short-term funding and liquidity.
Banks and the RBI use FX swaps to manage rupee and dollar liquidity. In a buy/sell swap, the RBI buys dollars spot (injecting rupees) and agrees to sell them back later, temporarily adding rupee liquidity to the banking system.
The RBI has run large dollar-rupee buy/sell and sell/buy swap auctions to manage durable liquidity without permanently changing its forex reserves. For corporates, currency swaps convert a loan in one currency into effective exposure in another over a multi-year horizon.
Related terms
- Forex ReservesForex reserves are the foreign-currency assets and gold the RBI holds to manage the rupee, pay for imports and meet external obligations during stress.
- Currency Swap vs Cross-Currency SwapAn FX swap exchanges principal at two dates with no interim interest, while a cross-currency swap exchanges both principal and periodic interest payments in two currencies over years.
- USDINRUSDINR is the exchange rate of the US dollar against the Indian rupee, the most-watched currency pair in India and a key barometer of capital flows and import costs.
- RBI InterventionRBI intervention is the central bank's buying or selling of foreign currency in the spot, forward or futures markets to manage rupee volatility and liquidity.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.