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The Reserve Bank of India (RBI) is conducting a $5 billion USD/INR buy/sell swap auction on May 26. Under this arrangement, banks will sell US dollars to the RBI (and RBI will sell rupee to banks) RBI buys dollars now Banks give US dollars to RBI. RBI gives Indian rupees (₹) to banks. Example: Banks → RBI: $5 billion RBI → Banks: equivalent amount in rupees This puts more rupees into the banking system. Simultaneously agree to buy them back at the end of a 3-year tenor. So, basically this swap will be reversed after 3 years. RBI sells dollars back later RBI makes an agreement that after a fixed period (say 3 years): Banks return the rupees RBI returns the dollars So it is like: "I take your dollars today and give them back later." Why RBI is doing this swap? Since last few days, RBI's aggressively sold dollars in the spot market (forex market) to defend the rupee (because rupee was depreciating and it has moved to $1=Rs.96). Spot dollar sales by RBI remove rupee liquidity from the banking system which results in tighter liquidity conditions in the economy. This swap by RBI will negate that effect, easing tight financial conditions. 1. To increase money in the market (liquidity) Suppose banks are short of cash. RBI injects rupees so banks have more money to: 1. give loans 2. support businesses 3. maintain smooth financial activity More gets pushes into Bank  money →more easy it becomes to lend money to people. If RBI simply bought dollars directly from the market: 1. Demand for dollars would rise 2.Dollar price could increase 3.Rupee might weaken suddenly 4.Using a swap helps provide liquidity without causing a major shock to exchange rates. @Study_Baba