The Reserve Bank of India is using a new tool to enhance liquidity in the system through which it would buy as much as dollar 5 billion from the banks in a swap deal that could inject nearly Rs. 35,000 crores into the system. Banks would be required to park dollar funds with RBI with a deal to buy it back from the RBI after three years.
The auction for this first of its kind US dollar buy/sell swap auction will take place on March 26. This is the first time the central bank is using a foreign exchange auction to augment banking liquidity after generally using bond purchases for the same all these years. RBI has infused more than Rs 2.36 lakh crore through such purchases so far this fiscal.
“In order to meet the durable liquidity needs of the system, the Reserve Bank has decided to augment its liquidity management toolkit and inject Rupee liquidity for longer duration through longterm foreign exchange buy/sell swap in terms of its extant Liquidity Management Framework. The US dollar amount mobilized through this auction would also reflect in RBI’s foreign exchange reserves for the tenor of the swap while also reflecting in RBI’s forward liabilities,” RBI said.
RBI has been an active participant in the dollar/rupee swap market but this is the first time the central bank has announced an auction. The swap will be a simple buy/sell trade in which banks can place bids to sell their excess dollars to the RBI in and simultaneously agree to buy the same amount at the end of the swap period.
“A similar kind of swap was used in 2013 for banks to swap their dollars received in the FCNR (B) scheme but that was at a fixed rate. This scheme is through an auction and is open to all banks which want to swap their dollars for rupees. All this while the RBI only used government securities to infuse liquidity. Using forex swaps could be to avoid the market distortions caused by using government securities for liquidity management,” said Hitendra Dave, head global markets, India at HSBC.
The auction cut-off for this swap would be based on the premium amount in paisa terms. Market participants will place their bids with the premium that they are willing to pay to the RBI for the tenor of the swap expressed in paisa terms. Successful bids will get accepted at their respective quoted premium. Minimum bid size for the auction is set at $25 million and banks will be allowed to submit multiple bids. However, the aggregate amount of bids submitted by single eligible entity should not exceed the notified amount of auction.
The Economic Times, 14th March 2019
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