MUMBAI, May 22 -- The Reserve Bank of India's surprise decision to conduct a $5 billion dollar-rupee buy/sell swap auction on 26 May is viewed as a move to ease stress in the forward currency market while also helping smooth liquidity conditions for banks facing funding pressure amid steady credit demand, four market participants told Mint.

The three-year $/INR buy-sell swap, announced by the RBI on Wednesday, comes when forward premiums have surged to as much as 4% and the rupee has remained under immense pressure following the war in West Asia and outflows by foreign portfolio investors.

Under the swap, a central bank buys dollars from commercial banks for Indian rupees and simultaneously agrees to sell the dollars back to the banks a...