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Informist, Thursday, Jan. 8, 2026

 

By Pratiksha

 

NEW DELHI – The Reserve Bank of India's $10 billion dollar-rupee buy-sell swap auction Tuesday is expected to sail through on strong participation from state-owned banks, private-sector banks, and corporations, market participants said. This will be the central bank's second swap auction within a month.

 

In a buy-sell swap auction, the RBI buys dollars for immediate delivery and sells them for delivery after three years, injecting rupee liquidity into the banking system. The auction is expected to draw strong interest, given ample dollar liquidity with banks, dealers said. 

 

"Last time's swap auction was oversubscribed," said Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services. "There was over two times the demand. This time as well I think it will be the same case." On Dec. 16, the RBI had conducted a $5 billion three-year buy-sell swap auction, receiving 222 bids totalling $10.35 billion. It accepted 118 bids worth $5.07 billion.

 

Given the interest expected, banks are unlikely to offer premiums significantly lower than current secondary market rates. Most market participants expect the swap auction cut-off to be 15-20 paise below the prevailing premium for three-year dollar-rupee forwards, though some dealers see it broadly around the current premium level.

 

The premium on the three-year exact-period dollar-rupee forward contract has declined by over 30 paise since the auction was announced Dec. 24, settling at 758.37 paise Thursday. Bids in the auction, placed in paise, reflect the premium participants are willing to pay for the tenor of the swap.

 

"The auction should happen at the market level easily. The $10 billion quantum is not a lot, as it is for three years and if you look at RBI's (forward dollar) maturities, most of it is in that duration. I do not see a reason why it should not go smoothly," said Alok Singh, treasury head at CSB Bank.

 

Market participants said dollar liquidity in the system remains adequate as the RBI has sold dollars aggressively in recent months to support the rupee. A case in point: the rupee posted its biggest single-day gain against the dollar in over three years on Dec. 19, appreciating more than 1%, thanks to the RBI's intervention.

 

"RBI is still intervening quite a bit in the spot (market)," Singh said. "These rupee levels would not be possible without intervention. So, there is no issue with dollar liquidity, I feel." The central bank net sold $11.88 billion worth of dollars in the foreign exchange market in October, the highest in 10 months, as per latest data from the RBI, marking the fifth straight month of net dollar sales.

 

Some dealers said participation by banks is likely to be high because of the large size of the auction. This is only the second time the RBI is conducting a $10 billion swap auction, the first having taken place in February. "It (participation) will mostly be by banks," said Singh. "Large treasuries, corporates would obviously be interested, no doubt about it. Because people with a larger exposure make a lot of money even in 2-3 points. So, it becomes a good opportunity."

 

Dealers said the $10 billion swap is aimed at extending the maturity profile of the RBI's forward book and smoothing receivables linked to forward assets. "The buy-sell swap should be seen more from the perspective of extending the maturity of the forward book rather than a liquidity infusion tool," Gaura Sen Gupta, chief economist at IDFC FIRST Bank, said in a note. "On a net basis, RBI net dollar selling in spot plus forward market (accounting for buy-sell swap, both auction and non-auction) has drained liquidity by INR 3.3 trillion in FYTD26 (till Dec. 15)."

 

Further, Sen Gupta said, "The $10 billion buy-sell swap in January will be used to extend the maturity of the forward book by replacing maturing swaps. There is a limit to how much the forward book size can be increased from already elevated levels." The RBI's net outstanding sales of forward dollars rose for the third consecutive month in November to a seven-month high of $66.05 billion. Its short positions in long-term forwards with maturities beyond one year stood at $28.08 billion at the end of November.

 

Some dealers also said the swap auction could help to cool the recent surge in forward premiums. The one-year forward premium hit an over-three-year high of 3.26% on Dec. 23 amid excess dollar liquidity in the system. The RBI announced the swap auction just a day after that. Higher forward premiums raise hedging costs for importers. 

"There may be multiple motivations to this swap auction. But I think the RBI has been prudent in announcing it at the right time," a senior treasury official at a state-owned bank said.  End

 

US$1 = INR 90.0175

 

Edited by Rajeev Pai

 

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