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RBI Plans One More $5-billion Dollar-Swap

The Reserve Bank of India (RBI) will conduct its second dollar-swap auction in a month to inject $5 billion (about Rs 34,500 crore) of liquidity into the banking system, marking a new trend in balancing the economy’s cash needs and ensuring speedier transmission of policy rate actions. “In order to meet the durable liquidity needs of the system, the Reserve Bank has decided to inject Rupee liquidity for longer duration through long-term foreign exchange Buy/Sell swap in terms of its extant Liquidity Management Framework,” RBI said Monday. The central bank will conduct the auction on April 23. “The US Dollar amount mobilised 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,” said the RBI note.
This is how the swap mechanism would work: High-street banks would sell dollars to the RBI at a dollar-rupee exchange rate fixed by the central bank. Three years later, the banks would buy back the dollars, in rupee terms, at an exchange rate that includes the cut-off premium. The cut-off premium is the threshold for banks to receive any allotment. Banks bidding at the cut-off level or above would get allotments. Normally, the  premium comes to less than the three-year MIFOR (Mumbai Interbank Forwards Rate). On March 23, the RBI conducted a similar auction to an overwhelming response. It had received bids for $16.3 billion against $5 billion on offer, the actual  sum targeted to help ensure enough system liquidity before the financial year drew to a close on March 31.
The move, however, also created a problem of plenty. Large banks borrowed overseas dollars to bid. While some banks either received partial allotments,  others bidding didn’t get enough allotments, leaving some lenders with excess dollars. That affected India’s spot currency market on the last working day of the financial year, March 29. The interest rate in the interbank dollar-rupee, near- maturity swap market — where banks exchange the greenback against the local currency — surged to more than 73% from 22% at the start of the day before  receding after likely central bank. 
The Economic Times, 2nd April 2019


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