Explanation – In a U.S. Dollar-Rupee swap auction conducted by the Reserve Bank of India (RBI): Banks sell U.S. dollars to the RBI in exchange for rupees at the current exchange rate (spot rate). Simultaneously, they agree to repurchase the same amount of dollars from the RBI at a future date by paying a premium over the spot rate. This mechanism is designed to inject rupee liquidity into the banking system while ensuring that the dollars are returned to the banks after the swap period. A buy/sell swap (RBI buys foreign currency and sells it later) injects rupee liquidity into the system, whereas a sell/buy swap (RBI sells foreign currency and buys it back later) absorbs excess rupee liquidity.

Source: The Hindu