RBI's $10-Billion Forex Swap Receives Strong Bids Amid Liquidity Deficit
The RBI received bids worth $16.23 billion from 244 sources for its dollar-rupee buy-sell swap auctions.
The Reserve Bank of India's $10 billion three-year forex swap auction held on Friday witnessed strong bids from domestic institutions.
The central bank received bids worth $16.23 billion from 244 sources for its dollar-rupee buy-sell swap auctions. Of these, 161 were accepted for $10.06 billion. The cut-off premium as a result was Rs 6.551, according to a statement.
The weighted average premium of accepted bids was Rs 6.7329.
On Friday, the Indian rupee closed sharply lower against the greenback, as demand for the safe-haven unit persisted in the wake of tariff outlook uncertainty. The rupee closed 32 paise weaker at 87.52 against US Dollar.
The RBI had notified the auction last week, as it sought to further add durable liquidity in the banking system. Market participants had anticipated that the measure would bring in a liquidity infusion of around Rs 87,000 crore in the banking system.
In January, the central bank injected $5 billion via a six-month forex swap.
A currency swap involves the RBI buying dollars from banks using rupees, with an agreement to sell those dollars back at a later date. This dollar purchase by the central bank increases the supply of rupees, or rupee liquidity, in the market.
Three-year durable liquidity will provide vision to market participants and is being considered as a positive move for shorter-duration bonds and could lead to mild steepening in the yield curve.
Long-term dollar-rupee buy/sell swaps could also reduce the chances of open market operations for the next two weeks at least, which could impact the long-term bonds and contribute to a mild steepening in the yield curve, market participants said.
This move has come as the central bank has been trying to infuse durable and transient liquidity in the banking system by market intervention tools, such as conducting open market bond purchases, longer-term and short-term variable rate repo auctions and dollar-rupee buy/sell swaps.
As of Feb. 20, before the auction was announced, liquidity in the banking system was in deficit of Rs 1.87 lakh crore.
