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Informist, Tuesday, May 26, 2026

 

By Aaryan Khanna

 

NEW DELHI – A dollar glut in the banking system combined with tight rupee liquidity held by banks pushed up the near-maturity dollar rupee forward rates Tuesday, dealers said. The cost for banks to convert dollar holdings for rupee cash overnight spiked to its highest since early April.

 

The cash-tom premium, which captures the cost for a bank to sell dollars immediately and buy them the next day, rose to a high of 1.70 paise Tuesday, Clearing Corp. of India data showed. The annualised interest differential of 6.4806% was the highest since Apr. 6, according to data from the central counterparty. Effectively, the cost of converting the dollar to rupee overnight surged to nearly 10% Tuesday after adding the overnight Secured Overnight Funding Rate of 3.55%, dealers said. 

 

"There is a surplus of dollars in the market since the RBI has left its intervention unsterilised so far, except for some minor activty in far (dollar-rupee) forwards," a treasury head at a private-sector bank said. "On the other hand, banks are facing a big problem on rupee deposits and even systemic liquidity has now gone dry after the GST (goods and services tax) payments."

 

The RBI has been continuously selling dollars in the spot market to limit the rupee's depreciation, including on Tuesday, dealers said. The domestic unit hit a record low of 96.96 per dollar last week, down nearly 8% in 2026. This has provided dollars to banks while wringing out rupees from the system to pay for these purchases. As rupee liquidity has declined, banks have begun charging higher rates to counterparties the overnight dollar conversion, dealers said.

 

Some banks had also built up their dollar holdings to bid at the RBI's three-year, $5 billion dollar-rupee buy-sell. The central bank accepted bids worth the notified amount, against a total bid amount of $9.80 billion. While some unsuccessful bidders at the swap auction received the one-year dollar-rupee forward premium, others looked to deploy their dollars in rupees, pushing up rates in the cash-tom market, dealers said. 

 

However, the signs of the spike have been building in near-maturity swap rates. The weighted average cash-tom rate was 2.10% on May 12, rising to 2.65% on May 19 and finally to 5.06% Tuesday. As the excess dollars have built up, banks' cash buffers in the rupee have dwindled, especially after payments worth around INR 2 trillion to the government for GST last week.

 

According to latest data, the RBI's net liquidity absorbed from the banking system--a proxy for the systemic liquidity surplus--was INR 673 billion Monday. The surplus had hit a near-two-month-low of INR 518.21 billion Saturday and was below INR 1 trillion for the fifth straight day. With banks not able to cheaply convert their dollars, their reliance on the money market to fund rupee liquidity requirements increased.

 

The weighted average call rate was 5.35% Tuesday, above the policy repo rate of 5.25%. The overnight tri-party repo rate ended at 5.40% Tuesday, its highest closing level since Jan. 29. Call money dealers attributed the sharp rise in rates before the market closed at 1600 IST to banks which missed out at the dollar-rupee swap auction.

 

"I'm surprised that the call and tri-party repo rates are only at this level. When you look at the dollar-rupee forwards, probably you'll find borrowers even at 6.00% today," a dealer at another private-sector bank said. 

 

The divergent liquidity situation is expected to normalise by Friday, after the settlement of the RBI's dollar-rupee swap auction. The central bank's action will mop up excess dollars while injecting rupees into the banking system on a durable basis, with the far leg in May 2029. Moreover, the government's month-end spending is also expected to improve frictional liquidity with banks. The RBI's net rupee liquidity absorbed from the banking system may rise to a comfortable INR 2 trillion by the end of the week, dealers said.  End

 

US$1 = INR 95.68

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

 

Edited by Akul Nishant Akhoury

 

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