RBI's second 3-year dollar-rupee swap auction too a grand success

The three-year forward premium was 775 paise in the morning before the auction

The Reserve Bank of India’s (RBI's) second three-year dollar-rupee swap auction was a massive success like the first one, even as it took just five large bids to cover the entire dollor 5 billion on offer. Market participants bid more than three times the offer, but the five successful bids were closer to the market rates and managed to shoot up the forward premium in the secondary market. “The aggressive bids most likely came in from a large corporate looking to hedge long-term dollar liabilities, such as external commercial borrowings,” said Abhishek Goenka, managing director of IFA Global.

RBI's second 3-year dollar-rupee swap auction too a grand success Since the other participants could not offload their dollar holdings, the central bank offered to buy up to Rs 25,000 crore of bonds from the secondary market in May to help with liquidity. The banking system was running a liquidity deficit of Rs 1.4 trillion as of Monday. Currency dealers say the excess dollar holding would likely cause pain for some banks in the coming days. A similar thing happened after the March auction, when the cash-spot rate shot up to a record high due to excess availability of dollars in the system. Otherwise, the bidding pattern, and subsequent rise in the forward premium indicated that the central bank could be nearing the end in using this liquidity tool.

The cut-off premium was significantly higher than the last auction. The forward premium rate spiked following the auction as banks are now expecting that the option to swap cheap may not be available next month. The forward premium for one year crossed 4.55 per cent after the auction, which is the level where the premium stays in normal time. The one-year forward rate had closed at 4.24 per cent on Monday. The rupee fell to 69.86 a dollar but closed at 69.63 on Tuesday.

“This indicates that the swaps are nearing the end. The market won’t let the RBI to push rates down further for long,” said Jamal Mecklai, managing director at Mecklai Financial Services. Banks offered $18.65 billion for an auction size of up to dollor 5 billion. The central bank received 255 bids, higher than March’s 240 bids. The cut-off premium was 838 paise. In the first auction on March 26, the cut-off was 776 paise. The three-year forward premium was 775 paise in the morning before the auction. It rose to close at 860 paise after the auction.

“Banks became desperate in swapping their dollars as the bidding started. There was excessive build-up of positions in the market,” said a senior currency trader with a foreign bank. A higher premium cut-off helps the central bank, whereas it pushes up cost for banks. Besides, the swaps leading to higher forward rates in the market is not good for the importers looking to hedge. Through the two auctions, the central bank infused Rs 69,435 crore of durable liquidity in the banking system, which was running at a deficit last week.

Last month, forward premiums had crashed following the announcement about such an auction. When it was announced first in early March, the forward premium for three years was 970 paise. The rates subsequently crashed, enabling large corporate houses with long-term foreign currency borrowings to hedge their exposures cheaply. But now, the rates are climbing again, even as banks are too eager to swap their dollars. “The prospects of auctions have induced significant volatility in the forward premium. Earlier the spot used to be volatile, but forward premium was largely stable. Now it moves 20-25 paise,” said Samir Lodha, managing director at QuantArt Markets, a treasury management firm.

The swaps also caused some volatility in the spot exchange rate of the rupee. Dollar demand was running high in the past two days as banks were stocking up on their greenback holding in order to swap with the RBI. The inflows have thinned to about dollor 2 billion in April so far, compared with nearly dollor 7 billion in March. Besides, crude oil prices jumped to cross dollor 74.50 a barrel after the US announced the lifting of sanctions exemptions for major oil importers from Iran. This has pushed up the price for the dollar and weakened the rupee.

“The rupee should recover some of the losses after the swaps. But there will be pressure till election results are declared in May,” said Satyajit Kanjilal, managing director of Forexserve.

Business Standard, 24th April 2019