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Currency swap auction success gives RBI an alternative liquidity tap

The Reserve Bank of India (RBI) on Tuesday infused Rs. 34,561 crore into the banking system in exchange for dollars, in its first dollar-rupee swap auction. In a statement, the central bank said the auction received bids for dollar 16.31 billion, approximately three times the notified amount. Through the auction, RBI bought dollars totalling dollar 5.02 billion at a premium of Rs. 7.76, which works out to an annualized rate of 3.76% from authorized dealers and paid them rupees in return. After three years, these banks will buy back the same amount of dollars at the premium offered in Tuesday’s auction.
The enthusiastic response to the auction could prompt the Indian central bank to take this route as an alternative to open market operations (OMOs), which are frequently used to manage liquidity, experts said. “It is a very well-offered auction and it only shows confidence within the central bank and the market participants that this instrument can be used as an alternative to OMOs,” said Ashish Vaidya, head of trading at DBS Bank in Mumbai. Vaidya added that the dollar swap is a good instrument as it balances out the onshore money market and the forexdriven money market rates that get skewed due to interventions by the central bank.
Saugata Bhattacharya, chief economist at Axis
Bank Ltd, agreed that the central bank could look at more such swaps in the future. “The current auction supplied Rs. 345.6 billion in fresh rupee liquidity, and our expectations of more forex swap auctions (may be another five auctions in the year ahead) will supply more than half the amount of liquidity likely to drain from currency in circulation,” he said. “It’s not necessarily banks’ balance sheet, but it could be the balance sheet of corporates, which could have decided the pricing of the issue. Corporates sitting on dollar funds raised through external commercial borrowings could have used this route through banks to hedge their risk,” said Kama Mahajan, head of treasury and global markets at Bank of Baroda. Swaps are part of the liquidity management framework and have been used regularly. They are also part of special programmes to sterilize the liquidity effects of forex intervention.
Bhattacharya said the immediate effect of the swap proposal was lower hedging costs.
The rupee closed at 68.86 on Tuesday, up 0.11% from Monday’s closing.
The Mint, 27th March 2019


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