The Reserve Bank of India (RBI) announced, on Monday, that it will conduct a $5 billion dollar-rupee sale auction once again on April 23 between 9.30 a.m. and 11.00 a.m. local time to inject liquidity into the system. The minimum bid size will be $10 million and multiples of $1 million for every bid above $10 million. The tenure of the deal is 3 years.
RBI had conducted a similar auction only last month on March 26 when it received as many as 240 bids valued at $16.31 billion, from banks. The bank regulator accepted and exchanged $5.02 billion at a premium rate cut off of Rs.7.76. This means that the dollars that were sold to RBI at Rs.70 per dollar can be bought back after the fixed period of 3 years at Rs.77.76 per dollar.
The dollar-rupee liquidity infusion tool will provide rupees to banks in exchange for dollars. The dollars that will be bought by the RBI will increase the forex reserves.
During the auction, the banks will bid the premium to be paid per dollar in addition to the prevailing rate. While the RBI wants the premium rate to be as high as possible, banks are looking to get a concession on the same. The forward rates which were 4.10 per cent before the RBI announced about the March 26 auction, dropped to 3.5 per cent, which gave banks the advantage.
Source: Business Standard