QOTD April1,2026

Consider the following statements regarding rupee-dollar swap auctions:

1. 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.
2. These swaps are used to inject rupee liquidity into the banking system.
3. 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:

1. Rupee-dollar swaps are a part of monetary policy tools used by the RBI.
2. 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:

1. Forex reserves include foreign currencies, gold, and Special Drawing Rights SDRs.
2. RBI is the custodian of India’s forex reserves.
3. 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:

1. A sell-buy swap by RBI results in absorption of rupee liquidity initially.
2. 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:

1. The RBI can influence the liquidity in the banking system through open market operations.
2. 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