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Category — GS Paper 3 ///Published — 2026-09-24 ///Exam — Both Prelims and Mains ///Tags — Rapid Fire CA, Quick Facts For Prelims, Banking Sector & NBFCs ///Category — GS Paper 3 ///Published — 2026-09-24 ///Exam — Both Prelims and Mains ///Tags — Rapid Fire CA, Quick Facts For Prelims, Banking Sector & NBFCs ///

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RBI's Forex Swap and VRRR: Managing Liquidity

The RBI mobilized over USD 143.5 billion through its special forex swap facility (launched June 2026) to support the rupee, primarily via FCNR(B) deposits (USD 132 billion). To absorb the resulting Rs 4.92 lakh crore liquidity surplus, RBI used a Variable Rate Reverse Repo (VRRR) auction (absorbing Rs 71,971 crore) and Open Market Operations. This highlights key monetary policy and forex management tools relevant to GS Paper 3.

2026-09-24

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RBI's Forex Swap Facility and VRRR Operations

The Reserve Bank of India (RBI) mobilized over USD 143.5 billion through its special forex swap facility to stabilize the weakening rupee, while simultaneously using liquidity absorption tools to manage the resulting Rs 4.92 lakh crore systemic cash surplus.

Special Forex Swap Facility

Launched by RBI in June 2026.
Allows commercial banks to swap foreign-currency inflows — such as FCNR(B) deposits and External Commercial Borrowings (ECBs) — with the RBI for rupees, while protecting banks from exchange-rate risk.
Objectives:
Encourage US-dollar inflows
Improve dollar liquidity in the forex market
Curb depreciation of the rupee
Composition of inflows (as of September 2026):
FCNR(B) deposits: USD 132 billion (overwhelming majority)
Rest from Overseas Foreign Currency Borrowings (OFCBs) and ECBs

Variable Rate Reverse Repo (VRRR) Auction

RBI conducted an overnight VRRR auction, absorbing Rs 71,971 crore from the banking system.
VRRR is a monetary policy tool under the Liquidity Adjustment Facility (LAF).
Purpose: Absorb excess liquidity for a specific duration so short-term overnight money market rates align with the benchmark policy repo rate.
Unlike fixed-rate reverse repos, the rate in a VRRR auction is determined through competitive bidding by commercial banks.

Open Market Operations (OMO)

Used alongside VRRR to permanently drain rupee liquidity by conducting sales of Government securities.

Significance

Demonstrates RBI's coordinated use of forex and liquidity management tools to balance currency stability with inflation/interest rate control.
Relevant to understanding LAF corridor, rupee stabilization, and forex reserves management.

Related Concepts

FCNR(B): Foreign Currency Non-Resident (Bank) deposits — foreign currency deposits held by non-resident Indians in Indian banks.
ECB: External Commercial Borrowings — borrowings by Indian entities from foreign sources.
LAF: Framework through which RBI injects/absorbs liquidity via repo and reverse repo operations.