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Informist, Tuesday, Dec. 3, 2024

--Dealers: Dollar/rupee premiums fall as RBI heavily sells forward dollars

--Dealers: RBI likely selling 1-3 month dollar/rupee forward contracts 

--Dealers: RBI aggressively selling near-term dollar/rupee forwards

--1-year forward dollar/rupee premium 1.98% vs 2.07% Mon

--Dealers: RBI selling fwd dlrs to manage liquidity drain from spot sales

By Pratiksha

NEW DELHI – The Reserve Bank of India is likely to have sold dollars heavily for one- to three-month forward delivery on Monday and Tuesday in order to neutralise its spot interventions and avoid draining rupee liquidity, dealers said. 

"They (RBI) are trying to push the dollar sales in spot to a later date due to liquidity issues," said a currency dealer at a private bank. "We are seeing heavy receiving from them (RBI)." Some dealers said the apex bank is likely to have sold dollars for six-month forward delivery as well. This would be the first time in over 18 months that the RBI is selling forward dollars with a maturity greater than three months. 

The central bank has been actively selling dollars in the domestic spot market to prevent sharp depreciation in the Indian unit. Given that spot dollar sales drain liquidity from the banking system, the RBI conducts buy-sell swaps to replenish liquidity. A buy-sell swap entails buying dollars for immediate delivery and entering into a contract to sell these at a future date, thereby postponing the drain on systemic liquidity. 

Following the central bank's action in the forwards market, premiums fell across tenures, with the premium on the one-year exact-period dollar/rupee forward contract falling to a four-month low of 1.98% Tuesday. 

According to latest data from RBI, liquidity was in a surplus of INR 894.51 billion on Monday. Liquidity conditions had deteriorated significantly at the beginning of November, and liquidity is expected to fall back into deficit in the coming days due to outflows for tax deducted at source and excise duty payments. 

Conducting buy/sell swaps not only helps the RBI manage the strain on liquidity but also prevents large drawdown on the central bank's headline foreign exchange reserves. While this will be a mere shift from the spot to forward book, now is a good time to arrest the fall in reserves, which have fallen to a near five-month low of $656.58 billion in the week ended Nov. 22. The foreign exchange reserves have now declined by over $48 billion from the record high of $704.89 billion hit in late September. A larger fall in reserves would raise questions about the RBI's ability to defend the rupee and encourage speculation against the domestic currency, dealers said. 

"There will be repercussions for your actions and that is what is happening," said a dealer at a state-owned bank. "Their (RBI's) reserves have dipped and liquidity has been pushed out. We were expecting something like this (buy/sell swap) since last month."

The RBI's recent buy/sell swaps in the dollar/rupee forwards market will add to its net outstanding short positions in forward contracts, which were already at their highest ever of $49.18 billion at the end of October. Informist had reported last week that the RBI has also ramped up its sales of non-deliverable dollar/rupee forwards in the offshore market to support the rupee, taking its outstanding NDF dollar sales to $60 billion-$70 billion.  End

US$1 = INR 84.74

Edited by Avishek Dutta

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