The Reserve Bank of India has announced that it will conduct a $5 billion buy/sell/swap auction to inject liquidity into the financial system on May 26.
The auction is slated to take place from 10:30 a.m. to 11:30 a.m. and will have a tenor of three years, according to the central bank's official release.
RBI uses the swap mechanism to inject rupee liquidity into the banking system while simultaneously managing foreign exchange reserves.
According to the release, the swap is in the nature of a "simple buy/sell foreign exchange swap" from the Reserve Bank side, wherein a bank shall sell US dollars to the Reserve Bank and simultaneously agree to buy the same amount of US dollars at the end of the swap period.
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Auction Bidding Price, Cut Off, Other Details
The cut off for the auction will be determined on the basis of the premium amount in paisa terms up to two decimal points, meaning that the market participants would be required to place their bids with the premium that they are willing to pay to the Reserve Bank for the tenor of the swap expressed in paisa terms up to two decimal places.
Following this, successful bids will get accepted at their respective quoted premium.The minimum bid size is would be $10 million and in multiples of $1 million thereafter. The central bank informed tthat eligible participants are 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 circular said. Results of the auction will be announced in the same day.
In the first leg of the bank will sell US dollars to the Reserve Bank at FBIL Reference Rate of the auction date. The FBIL Reference Rate refers to the official benchmark exchange rate computed and published daily by Financial Benchmarks India Pvt. Ltd.
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"The settlement of the first leg of the swap will take place on spot basis from the date of transaction and the Reserve Bank will credit the rupee funds to the current account of the successful bidder and the bidder needs to deliver US dollars into the RBI's nostro account," the circular outlined.
Similarly, for the reverse leg of the swap auction, rupee funds will have to be returned to the Reserve Bank along with the swap premium to get the US dollars back.
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