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Informist, Monday, Dec. 8, 2025

 

By Pratiksha

 

MUMBAI – The Reserve Bank of India's decision to conduct a dollar-rupee buy-sell swap auction next week was in line with market expectations and is likely to draw strong participation from companies as well as state-owned and private-sector banks, market participants said. The central bank will conduct a $5 billion buy-sell swap auction on Dec. 16, wherein it will buy dollars for immediate delivery and sell them for delivery after three years.

 

The FX swap auction, which is aimed at injecting rupee liquidity into the banking system, will likely see strong participation due to ample dollar liquidity with banks, dealers said. "The market is stuffed with dollars. So, there should be no issue in parking dollars at the swap auction," a senior treasury official at a private-sector bank said. "The auction will be subscribed fully for sure."

 

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 20-30 paise lower than the current premium for three-year dollar-rupee forwards. However, some dealers expect the cut-off to be broadly around the current premium level.

 

After the auction announcement Friday, the premium on the three-year exact-period dollar/rupee forward contract fell almost 40 paise and ended at 770.47 paise. On Monday, the premium settled at 782.21 paise. The auction cut-off will be based on the premium amount in paise terms.

 

"I think enough demand will be there for the swap. It is not a big amount and should be absorbed easily," Alok Singh, treasury head at CSB Bank, said. "The swap will also help in softening of the forward premiums."

 

Market participants said dollar liquidity in the system is adequate as the RBI has sold dollars heavily to support the rupee in the last few months, before loosening its grip this month. On a gross basis, the central bank sold $10.11 billion in the foreign exchange market in September, as per latest RBI data. The central bank net sold dollars in the forex market for the fourth straight month in September.

 

Some dealers said participation by companies would also be high due to the longer tenure of the swap auction. However, they highlighted they had expected the quantum of the auction to be higher or as big as the RBI's last swap auction. In March, the central bank had held its biggest ever $10-billion buy-sell swap auction for three years.

 

"Going by the previous instances, I don't think there will be any challenges for the swap," Ritesh Bhusari, deputy treasury head at South Indian Bank, said. "I think the demand will be more from the corporates' side. On banks' side I am not very sure because the swap costs are very high."

 

POST-AUCTION SCENARIO

Before announcing the swap auction, the RBI had been doing such buy-sell swaps intermittently since October. However, market participants expect more buy-sell swap auctions by the central bank in coming days as they view the liquidity measures announced as being inadequate to facilitate monetary policy transmission and to ensure easy monetary and financial conditions. The central bank has also announced INR 1.00 trillion of open market operations purchases of gilts in two tranches this month.

 

Durable liquidity is in a surplus of INR 3.61 trillion as on Nov. 14, according to latest data. While this will get a boost from the INR 660 billion addition on account of a cash reserve ratio cut, the RBI's consistent dollar sales – both in the spot market and by taking delivery of a maturing dollar-rupee buy-sell swap – is driving down rupee liquidity. December is a seasonally tight month for banking liquidity with advance tax and goods and services tax payments between Dec. 15 and Dec. 22 draining over INR 3 trillion of cash. The March quarter is likely to a see further organic outflows from the banking system on account of an increase in currency in circulation.

 

"I think more swaps will happen. RBI must know that liquidity will tighten in future and would take necessary steps," Singh said. "I am 100% sure more OMOs or swaps will happen in February-March. It is just a matter of which option RBI chooses over the other."

 

Moreover, the size of the RBI's net short outstanding dollar-rupee forward book has started ballooning again since September and was at a five-month high of $63.61 billion at the end of October. Almost 59% of the RBI's entire forward book has a maturity period of up to one year. If the central bank were to deliver dollars against these outstanding forward sales, it would end up draining around INR 3.37 trillion from the banking system over the next one year.

 

Thus, the apex bank may have no choice but to roll over its forward dollar sales and ideally, elongate their maturity profile as it is doing with the three-year swap next Tuesday, dealers said. "RBI would have to do even more liquidity injection in Jan-Mar given the demand for currency and perhaps if it chooses to reduce its short forward position which is currently estimated at $63 billion with a large concentration in up to 3-month maturity window," ICICI Bank said in a note. 

 

With the upcoming buy-sell swap auction and potentially more in the pipeline, market participants are of the view that dollar-rupee forward premiums are in for highly volatile times.  End

 

US$1 = INR 90.07

 

Edited by Ashish Shirke

 

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