The Central Bank is buying and selling dollars in the foreign exchange swap (FX swap) market in a bid to defend the exchange rate and mop up excess rupee liquidity, so far trading US$ 55 million this week and absorbing about Rs. 6 billion in excess liquidity, dealers said.

"The Central Bank is selling dollars at spot exchange rates and buying dollars at forward exchange rates and this effectively mops up any excess rupee liquidity," a dealer said.

Dealers said the Central Bank had two auctions this week for US$ 20 million on Tuesday and US$ 35 million on Wednesday.

The Central Bank has been absorbing dollars in the domestic foreign exchange market to boost reserves, and also to prevent an appreciation of the rupee which could hurt exporters, releasing excess rupees into the system which was then mopped up by selling government securities.

"The Central Bank ran out of its Treasury bill holdings and began to offer its own securities (called Central Bank Securities). This cost the Central Bank about eight to 8.5 percent as interest overnight.

"By entering the FX swap market, the Central Bank’s effective cost to mop up excess liquidity would now be in the range of four to five percent given the different rates at which dollars are bought and sold," a dealer said.

Dealers said things were quiet in the foreign exchange market with the Central Bank continuing to defend the exchange rate at 114.80/85. Excess rupee liquidity amounted to about Rs. 26 billion as at Wednesday evening.

As at October 15, the Central Bank has purchased approximately US$ 2.5 billion from the domestic foreign exchange market and prevented the rupee from appreciating against the dollar as inflows began to improve after the war ended last May.