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Informist, Thursday, Jan. 30, 2025

 

By Pratiksha and Sourabh Kumar

 

MUMBAI/NEW DELHI – The Reserve Bank of India's first foreign exchange buy/sell swap auction in nearly six years is likely to draw strong participation from state-owned banks, private banks, as well as corporates, market participants said. The central bank will conduct a $5 billion dollar/rupee buy/sell swap auction on Friday, wherein it will buy dollars for immediate delivery and sell them for delivery after six months. The swap will reverse on Aug. 4. 

 

The FX swap auction, which is aimed at injecting rupee liquidity into the banking system, may see strong participation owing to ample dollar liquidity with banks, dealers said. "There is enough dollars at our disposal. What banks need is rupee liquidity. So I am sure we will see a decent number of bids," a senior treasury official at a state-owned bank said. 

 

Considering the widespread participation expected at the auction, banks are unlikely to offer to pay the RBI premiums that are significantly lower than the prevailing secondary market rates. Most market participants expect the cut-off for the swap auction to likely be 5-10 paise lower than the current premium level of the six-month dollar/rupee forward contract. However, some expect the cut-off to be broadly around the current premium level.

 

The premium on the six-month exact-period dollar/rupee forward contract has declined 10 paise since the auction announcement on Monday and settled at 94.93 paise on Thursday. The auction cut-off will be based on the premium amount in paise terms. Market participants would be required to place their bids with the premium that they are willing to pay to the central bank for the tenor of the swap. 

 

Banking system liquidity has been in deficit since mid-December, with money market dealers attributing the tightness to the RBI's spot dollar sales in order to soften the rupee's depreciation against the greenback. The RBI's daily net liquidity injections – a proxy for the systemic liquidity deficit – averaged nearly INR 2 trillion in January. The net liquidity injected hit its highest in a year on Friday, at INR 3.16 trillion. Latest RBI data also shows the durable liquidity has slipped into deficit for the first time since July 2019, on Jan. 10.

 

Dealers said dollar liquidity is adequate as the RBI has heavily sold dollars to support the falling rupee ever since Donald Trump won the US Presidential elections. The dollar index has surged over 5% since Trump's victory in November. "Dollar liquidity has not been an issue. In the last few days, in fact, FPIs (foreign portfolio investors) have turned buyers (of shares)," said Anshul Chandak, head of treasury, RBL Bank.

 

However, some dealers said that banks' participation would have been much higher if the tenure of the swap auction was longer. "Had it (auction tenor) been a little longer, the interest would have been more because banks can then adjust FCNR (Foreign Currency Non-Resident) deposit rates and garner some deposits. However, given the liquidity situation, there will be takers for it," Chandak said. 

 

Before announcing the swap auction, the RBI had been doing such buy/sell swaps intermittently since last month. However, market participants expect more buy/sell swap auctions for longer tenors by the central bank in the coming days as they view the currently announced liquidity measures as not adequate to ease the tight financial conditions. 

 

"This swap might be just a gesture to reign in rising swap costs and inject INR liquidity, and we may see more swaps for longer tenures, such as for one-year," said Alok Singh, group head-treasury at CSB Bank. 

 

While forward premiums have fallen across tenures after the announcement of the swap auction, and may fall further once the auction takes place, market participants see a limited downside movement in premiums. Some dealers said that premiums may, in fact, recover after falling briefly following the auction as importers and corporates may rush to buy dollars for forward delivery, noting the lower premium levels and a depreciation in the rupee. So far this month, the rupee has depreciated 1.1% against the dollar.  End

 

US$1 = INR 86.6250

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Saji George Titus

 

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