India’s central bank used currency swaps to drain cash from banks, according to people familiar with the matter

India’s central bank, the Reserve Bank of India (RBI), has reportedly engaged in currency swaps to manage liquidity within the banking sector. The move comes as surplus liquidity in the system reached significant levels, prompting the RBI to intervene. This operation involved a foreign-exchange sell/buy swap, where the RBI initially sells dollars for rupees and later repurchases them, effectively removing excess rupee cash from banks temporarily. The central bank’s action is seen as an effort to control short-term money-market rates and align them with policy levels, reflecting a strategy to absorb surplus liquidity. Market participants appear to interpret this development as a sign of tightening liquidity conditions in India, potentially impacting the global gold market. The move could strengthen the U.S. dollar, which historically has an inverse relationship with gold prices. This interpretation is reflected in prediction markets, where the likelihood of gold reaching high price levels by the end of December 2026 remains low. Key Takeaways The Reserve Bank of India’s use of currency swaps appears consistent with efforts to absorb excess liquidity and stabilize money-market rates....