RBI's $5 bn forex swap auction proves a hit
Earlier this month, the RBI had announced that it would buy dollars from banks for three years and offer them rupees in return.
Mumbai: The Reserve Bank of India’s $5-billion forex swap auction on Tuesday elicited strong response from banks, with bids coming in for more than three times the amount of dollars sought.
Under the dollar/rupee swap auction, the central bank received 240 bids worth $16.31 billion against the notified amount of $5 billion. The apex bank bought the entire $5 billion it targeted from banks at the auction. In turn, Rs 34,561 crore will be infused into the banking system on Thursday, easing the current liquidity crunch.
The long-term dollar/rupee swap auction has a three-year tenor. The cutoff was set at a premium of Rs 7.76. Experts believe that the success of the new liquidity tool might prompt the RBI to come out with more of such liquidity injections in the future.
However, it also have to be seen how banks manage to return the rupee funds in March 2022 as liquidity is usually tight in March every year because of advance tax outflows and the busy credit season.
Says Ashutosh Khajuria, Executive Director at Fedecral Bank, “The swap will bulk up RBI’s forex reserves by $5 billion while banks will get rupee liquidity of Rs 34,561 crore. The cut off of Rs 7.76 is a market-determined interest differential between the two currencies for three years."
Earlier this month, the RBI had announced that it would buy dollars from banks for three years and offer them rupees in return.
According to traders, if the RBI uses the new tool again in future, it could scale down the purchase of bonds through open market operations (OMO). The RBI has bought Rs 3 lakh crore of debt this fiscal.
The annualised one-year dollar/rupee forward premia dropped one-basis point after the cutoff announcement to 3.64 per cent, according to Bloomberg data.
Says Khajuria, "Banks get dollars from their NRI customers, paying an interest of 2.5 per cent to 3 per cent. Now by deploying the rupee funds that they have received from the RBI at profitable rates (for home loans, auto loans, personal loans or other avenues) the banks can make good money."