Skip to main content

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


Popular posts from this blog

SC order on RBI circular: More options for banks to tackle defaulting firms

Lenders also have the option of restructuring the loans Lenders to companies which are under stress could now have three options to deal with them if they default on loans: take a haircut as part of a one-time settlement, restructure the loans for a longer tenure as they did when corporate debt restructuring schemes were allowed, or go to the Insolvency and Bankruptcy Code (IBC) for redress. These changes in the options available to lenders come, according to PE funds and bank lawyers who are involved in the IBC process, in the wake of the Supreme Court on Tuesday setting aside the 12 February RBI circular, which allowed a 180-day window to banks to resolve a company default.But they can still find a resolution. According to a Reserve Bank of India circular, a loan becomes a non-performing asset when banks cannot find a way of recovering their money in 90 days. In short, banks still have a window to resolve the default. Lenders can take a haircut as part of a one -time settlement of du…

April GST collections at new high despite rate rationalisation in December

Goods and services tax (GST) collection touched a record high in April, exceeding Rs 1 trillion for the third time in four months. The mop-up was 10 per cent higher over the previous year. Gross collection for the month was Rs 1.13 trillion, said the finance ministry. Despite the recent rate rationalisation in December, a rise in collection was reported. Of the total collected, the CGST (central GST) contributed Rs 21,163 crore, the SGST (state GST) Rs 28,801 crore, the IGST (integrated GST) Rs 54,733 crore (including Rs 23,289 crore on import) and cess Rs 9,168 crore (including Rs 1,053 crore on import). After settlement of the IGST and the balance IGST in a 50:50 ratio between the Centre and states on a provisional basis, the CGST stood at Rs 47,533 crore and SGST at Rs 50,776 crore. The CGST target in the Union Budget for 2019-20 is Rs 6.1 trillion. “The April collection indicates the tax base is increasing gradually, with GST getting stabilised with measures such as e-way bills and…

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…