Question of the Day – RUPEE & DOLLAR SWAP AUCTIONS
QOTD April1,2026
Consider the following statements regarding rupee-dollar swap auctions:
- In a rupee-dollar swap auction, the central bank buys dollars and sells rupees with an agreement to reverse the transaction at a future date.
- These swaps are used to inject rupee liquidity into the banking system.
- Rupee-dollar swaps permanently alter the foreign exchange reserves of the country.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (a) 1 and 2 only
Explanation:
Statement 1 is correct
In swap auctions, RBI buys dollars and releases rupees with a future reversal agreement
Statement 2 is correct
Such operations increase rupee liquidity in the system temporarily
Statement 3 is incorrect
Swaps are temporary and do not permanently change forex reserves
Why in news–
The Reserve Bank of India has recently conducted rupee-dollar swap auctions to manage liquidity in the banking system and stabilize the rupee amid global financial uncertainties. These auctions are used as a monetary policy tool to address short-term dollar shortages and influence forex liquidity, making them important for understanding external sector management for UPSC prelims.
News-RBI’s $5 billion dollar/rupee swap auction sees strong demand – The HinduBusinessLine
There are more questions from this topic that you should practice to make your concepts stronger.
Practice Questions (PQ)
PQ1.Consider the following statements:
- Rupee-dollar swaps are a part of monetary policy tools used by the RBI.
- These swaps can help in managing volatility in exchange rates.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) both 1 and 2
(d) neither 1 nor 2
Answer : (c) both 1 and 2
Explanation:
Statement 1 is correct
RBI uses swaps as a liquidity management and monetary tool
Statement 2 is correct
They help stabilize currency by managing dollar supply
PQ2. Consider the following statements regarding forex reserves:
- Forex reserves include foreign currencies, gold, and Special Drawing Rights SDRs.
- RBI is the custodian of India’s forex reserves.
- Forex reserves are only affected by trade balance.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (a) 1 and 2 only
Explanation:
Statement 1 is correct
Forex reserves consist of multiple assets including SDRs and gold
Statement 2 is correct
RBI manages and holds these reserves
Statement 3 is incorrect
They are affected by capital flows, FDI, FPI, and RBI interventions also
PQ3. Consider the following statements:
- A sell-buy swap by RBI results in absorption of rupee liquidity initially.
- A buy-sell swap results in injection of rupee liquidity initially.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) both 1 and 2
(d) neither 1 nor 2
Answer: (c) both 1 and 2
Explanation:
Statement 1 is correct
In sell-buy swap, RBI sells dollars and absorbs rupees first
Statement 2 is correct
In buy-sell swap, RBI injects rupees by purchasing dollars
Previous Year Question (UPSC Prelims)
With reference to the Indian economy, consider the following statements:
- The RBI can influence the liquidity in the banking system through open market operations.
- The RBI can influence the exchange rate by intervening in the foreign exchange market.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) both 1 and 2
(d) neither 1 nor 2
Answer: (c) Both 1 and 2
Explanation:
Statement 1 is correct
Open market operations are a key liquidity management tool
Statement 2 is correct
RBI intervenes in forex markets to manage volatility in exchange rate
