RBI conducts $10 bn forex swap to inject liquidity

The Reserve Bank of India’s (RBI’s) $10 billion US dollar-rupee buy-sell swap auction for three years received bids worth $16.23 billion on Friday, reflecting robust demand amid persistent liquidity deficit in the banking system.

Photograph: Danish Siddiqui/Reuters

This was the second swap auction by the central bank after it infused $5 billion via six month-swap on January 31.

Of the 244 bids, the RBI accepted 161 bids worth $10.06 billion for a tenure of three years. The cut-off premium was set at ₹6.55, which was lower than market expectations.

The average premium on accepted bids was ₹6.73.

“The demand was stronger than expected. The cut-off was seen at around ₹6.62,” said the treasury head at a private bank.

“The forward premiums eventually fell after the auction result,” he said.

A currency swap is a transaction where the RBI buys dollars from banks in exchange for rupees, with a commitment to sell those dollars back at a later date.

The purchase of dollars by the central bank effectively increases the supply of rupees, or rupee liquidity, in the market.

Market participants said there was strong demand from the corporate sector while banks were demanding higher premiums.

“A lot of participants, especially banks would have bid at the tail in anticipation that RBI will receive a premium aggressively. 83 of 244 bids, which means almost one-thirds were not accepted,” said Abhishek Goenka, chief executive officer at IFA Global.

“It did not make a lot of commercial sense for banks to bid too aggressively given RBI is in a rate cut cycle and cost of funds is not likely to increase dramatically in the foreseeable future.

“The incentive for banks would have been that it does not exhaust counterparty limits as the counterparty in this case is the RBI.

“The banks would therefore not have any capital charge considerations,” Goenka added.

The net liquidity in the banking system was in a deficit of ₹1.81 trillion as of Thursday, according to the latest data by the central bank.

The net liquidity in the banking system has been in deficit mode for the past eleven consecutive weeks.

Meanwhile, the rupee depreciated by 31 paise against the dollar as foreign investors sold domestic equities amid growing concerns over a trade war after US President Donald Trump announced that tariffs on Canada and Mexico would take effect next week and that additional tariffs will be imposed on China.

In response, Canada pledged to take swift retaliatory measures.

The dollar index rose to 107.37 on Friday, against 106.62 on Thursday.

It measures the strength of the greenback against a basket of six major currencies.

The broader equity indices were down almost 2 per cent on Friday.

The local currency settled at 87.51 against the dollar on Friday, against the previous close of 87.20 per dollar.

The rupee has depreciated by 4.69 per cent in the current financial year so far, whereas it has witnessed 2.17 per cent depreciation in the current calendar year so far.

Market participants said the RBI intervened in the foreign exchange market via dollar sales to curb excess volatility.

“There was intervention today (Friday), the PSU banks were the major participants in the market,” said the treasury head at another private bank.

“The 87.50 per dollar level is crucial, the rupee traced back 4-5 paisa to 87.50 per dollar.

“We will have to see where the dollar index moves from here,” he added.

India’s foreign exchange reserves rose by $4.7 billion to $640 billion during the week ending February 21, on the back of the rise in foreign currency assets, which rose by $4.2 billion in the previous week, according to the latest RBI data.

Gold reserves increased by $426 million during the week.

“The data shows there is two-way intervention with downward resistance at 86.6 and upward at 87.5,” said the treasury head at a state-owned bank.

“Partially it is a valuation effect, but the RBI was the net buyer in the week,” he added.

The rupee appreciated 0.14 per cent against the dollar for the week ended February 21.