RBI Injects Rupee Liquidity Via Forex Swap Auction

The Reserve Bank of India’s attempt to inject rupee liquidity through foreign exchange swap auction has received good response.

Against the notified amount of $5 billion for the rupee-dollar swap, banks authorised to deal in foreign exchange offered $16.31 billion at the auction. Out of $16.31 billion received via 240 offers by market participants, the RBI accepted $5.02 billion via 89 offers. The liquidity of ₹34,561 crore generated due to the swap auction could support credit growth — especially at a time when credit growth is outpacing deposit growth — and soften bond yields.

The RBI has different tools through which it injects liquidity into financial markets. The ‘swap auction’ which was conducted today is one such tool. This is being done to increase the supply of rupees in the market. Technically, this activity is termed as a USD/INR buy/sell swap auction.

The response to the auction may prompt the central bank to conduct more such swaps, thereby reducing the requirement for it to conduct open market operation of government securities or intervene in the forex spot market, say forex market dealers.

Under the buy/sell foreign exchange swap, a bank will sell dollars to the RBI and simultaneously agree to buy the same amount of dollars at the end of the swap period.

The cut-off (forward) premium for three years came in at 776 paisa. The weighted average premium of the accepted offers was at 791.88 paisa. The transaction, which was announced on March 13 and conducted on Tuesday, was spot (market) neutral, said dealers.

The dollar amount mobilised through the auction would reflect in the RBI’s foreign exchange reserves for the tenor of the swap as also in the RBI’s forward liabilities. “Apart from diversifying liquidity-infusion efforts, this measure is expected to ease longer-tenor forward premia, helping to lower hedging costs.

“This is opportune considering recent changes to external commercial borrowing limits, particularly for state-owned oilers and NBFCs, introduction of the voluntary retention route for portfolio investors and better foreign flows,” said Radhika Rao, Senior Vice-President, DBS Bank Ltd.