Why is the RBI selling dollars and bonds as the rupee falls?
An earlier RBI programme brought dollars in and released rupees into banks. Now the central bank is managing currency pressure and surplus cash with different tools.
On 11 September, the rupee fell as far as ₹95.79 to the dollar before closing at ₹95.55. State-run banks sold dollars during the session, which traders widely read as Reserve Bank of India intervention, Reuters reported. Later that day, the RBI announced that it would sell ₹1 lakh crore of government bonds from its portfolio over three auctions.
Put those headlines together and the central bank can look confused. If the rupee is under pressure, why sell bonds and risk pushing Indian interest rates higher? Why has the RBI also been conducting foreign-exchange swaps and asking banks to park spare cash with it?
The link is an earlier operation: the programme that attracted dollars also released rupees into the banking system. The RBI is now addressing currency pressure and surplus cash at the same time. Following what it buys and sells explains why the tools can serve different purposes.
The story starts with dollars coming in, not going out
In June, the RBI opened a special window intended to strengthen India's balance of payments. The most important part concerned Foreign Currency Non-Resident (Bank), or FCNR(B), deposits. These are fixed deposits that Indians living abroad hold with Indian banks in a foreign currency.
For eligible new deposits with a maturity of three to five years, a bank could sell the incoming dollars to the RBI and agree to buy the same amount back at the end of the term. Both legs used the same exchange rate. The RBI's circular describes this as an at-par swap.
Follow the first leg. A bank receives dollars from its depositor. It hands those dollars to the RBI. The RBI pays the bank rupees. India's central bank has added foreign currency to its reserves, while the banking system has gained rupee cash.
The bank still owes its depositor. When the swap matures, it returns rupees to the RBI and receives dollars back. Fixing the exchange rate for that return leg makes the currency risk easier for the bank to manage.
The response was enormous. By 31 August, provisional inflows through the special facilities had reached $136.377 billion. FCNR(B) deposits supplied $127.226 billion—93.3% of the total by calculation. The remaining inflows came through overseas foreign-currency borrowing by banks and external commercial borrowing by companies.
- FCNR(B) deposits
- $127.226bn
- Overseas foreign-currency borrowing
- $5.260bn
- External commercial borrowing
- $3.891bn
Provisional inflows totalled $136.377 billion. FCNR(B)’s 93.3% share is a BharatContext calculation. Source: Reserve Bank of India.
The dollars improved the RBI's foreign-exchange buffer. The rupees created a second task.
Why can too much bank cash be a problem?
Banks need liquidity: cash they can use to settle payments and meet withdrawals. But when the system has far more cash than it needs, banks have little reason to borrow overnight. The market price of overnight money can then sink below the policy rate the RBI is trying to transmit through the economy.
The policy repo rate was 5.25%. On 7 September, however, the weighted average call rate—the RBI's operating target for overnight money—was 4.97%. That was even below the 5% standing deposit facility rate, the rate banks can normally earn by leaving eligible surplus funds with the RBI.
The banking-system surplus was estimated at a record ₹11.16 lakh crore on 6 September, according to Reuters. Not all of that came from one programme, and liquidity changes daily as government balances, currency demand and RBI operations move. But the size explains why the central bank reached for several drains rather than one.
Five interventions that sound similar but are not
Central-bank action is easiest to understand by tracking the things that change hands. Ask three questions: Who receives dollars? Who receives rupees? Does the transaction automatically reverse?
June special swap
Dollars to RBI · rupees to banks
Reverses after 3–5 yearsAttract foreign currencySpot dollar sale
Dollars to market · rupees to RBI
No automatic reverse legCushion a disorderly fallSell/buy FX swap
Dollars out · rupees in
Both flows reverseDrain cash temporarilyVRRR
Banks park rupees at RBI
Cash returns at maturityDrain cash temporarilyOMO bond sale
Bonds to banks · rupees to RBI
No preset cash returnDrain cash durablyA spot dollar sale points the other way. The RBI supplies dollars to the market and receives rupees. More dollar supply can soften a disorderly fall in the currency; taking rupees in payment also removes domestic liquidity. Traders said state-run banks were selling dollars on 11 September, although the RBI does not publish a live account of each intervention. The rupee still ended the week 1.1% lower, its sharpest weekly fall since mid-May, Reuters reported.
A sell/buy foreign-exchange swap also gives banks dollars and takes rupees from them today, but with a promise to reverse both flows later. That makes it a temporary liquidity drain. Dealers said the RBI used short-dated swaps during the week, alongside spot intervention. Swaps can also affect forward-dollar pricing, so they are not simply a delayed spot sale.
A variable-rate reverse repo, or VRRR, does not involve dollars. Banks lend spare rupees to the RBI for a fixed period and earn the auction rate. The money returns when the operation matures. On 7 September, banks placed ₹3.53 lakh crore in an overnight VRRR and ₹2.59 lakh crore for 30 days, according to the RBI's money-market release. The longer auction had been notified for as much as ₹7 lakh crore, but banks did not offer anything close to that amount. A bank may have spare cash today and still hesitate to lock it away for a month.
An open-market operation, or OMO, bond sale is more durable. Banks and other buyers pay rupees for government bonds held by the RBI. The rupees move to the central bank and the bonds move into the market. Unlike a reverse repo or swap, there is no preset date on which the original cash must return.
What exactly has the RBI planned?
The announced schedule set out ₹50,000 crore for 17 September, followed by ₹25,000 crore on 21 September and another ₹25,000 crore on 28 September. The official announcement says the decision reflects “current and evolving liquidity conditions.” The first auction covers six government securities maturing from 2029 to 2032.
This is the RBI's first net secondary-market bond sale in two years, according to Reuters. Its exchange-rate effect is indirect: removing rupees can support domestic interest rates and make rupee assets somewhat more attractive, but a bond sale does not put dollars into the currency market.
6 September 2026₹11.16tn
17 September, 21 September, 28 September₹1.00tn
The surplus estimate is a one-day market snapshot; the OMO figure is a three-auction plan. Comparing them gives scale, not a claim that the OMO must remove the full surplus. Sources: Reuters and RBI.
The planned OMO is about 9% of that one-day surplus estimate. Actual absorption will depend on accepted bids and other flows: tax payments, currency demand and further RBI operations can all change the cash available to banks.
RBI Governor Sanjay Malhotra had signalled the choice earlier on 11 September. The central bank's aim, he said, was to keep the overnight call rate aligned with the 5.25% repo rate, and both bond sales and foreign-exchange swaps were available for managing liquidity. Hours later, the OMO calendar made that signal concrete.
Bond sales have a cost
When the RBI adds government bonds to the market, buyers generally demand a more attractive price. Bond prices and yields move in opposite directions, so extra supply can lift yields. That matters beyond traders' screens: government bond yields are reference rates for borrowing elsewhere in the economy.
After the announcement, India's benchmark 10-year yield rose six basis points to 7.035%, while the five-year yield rose by as much as ten basis points, Moneycontrol reported. Rising crude oil prices and US bond yields were also pressuring Indian debt that day, alongside the additional bond supply announced by the RBI.
The RBI therefore faces a balancing act. Leave too much cash in banks and the overnight rate can remain below the policy corridor. Remove cash too abruptly and bond yields or short-term funding costs can jump. Sell too many dollars and reserves fall; sell too few during a disorderly move and the rupee can overshoot. The tools can reinforce one another, but none is free.
Can the RBI stop the rupee from falling?
It can lean against the move. It cannot permanently command the exchange rate while every other force carries on unchanged.
The rupee's September pressure came with expensive crude oil, higher US yields and demand for dollars from importers. India imports most of the crude it consumes, so an oil rally raises the country's dollar bill. Higher US yields can also make dollar assets more attractive. RBI intervention changes the timing and liquidity of the market; it does not make oil cheaper or require global investors to buy Indian assets.
Six bankers told Reuters that the RBI had sold at least $8 billion in the week ended 4 September; their individual estimates ranged from $8 billion to $15 billion. The central bank did not confirm the number. The range reflects the uncertainty in dealer estimates.
Large headline reserves do not guarantee an appreciating currency either. They give the RBI more capacity to manage volatility. Whether the rupee rises or falls still depends on the balance of imports, exports, capital flows and global demand for dollars.
What should we watch next?
The three OMO auctions provide one test. The amount actually accepted, the prices investors demand and the reaction in five- and ten-year yields will show how expensive the liquidity drain is becoming.
The second is the overnight call rate. If it moves back toward the 5.25% repo rate as surplus cash falls, the clean-up is doing its monetary-policy job. If it remains below the standing deposit facility rate, the RBI may need to drain more.
The third is the mix of currency operations. Official reserve and forward-position data, which arrive with a lag, help establish how much intervention used spot sales and how much involved future commitments.
Most of all, watch oil prices, US yields and portfolio flows. If those pressures ease, RBI operations have room to work. If they intensify, the central bank may smooth the path without changing its direction.