The Reserve Bank of India (RBI) was successful in introducing a sound liquidity tool to improve the liquidity situation in India through the rupee-dollar swap auction that it conducted on 26 March 2019. The bank regulator received bids valued at a total of $16.3 billion against the requirement of $5 billion.
The RBI accepted dollars valued at $5.02 billion at a cut-off premium equal to Rs.7.76 per 3 dollars. So, the swap deal will allow banks to exchange the dollars for rupees at Rs.68.86 per dollar and exchange it back from the RBI at Rs.76.62 per dollar. The exchange rate includes the cut-off premium rate and will not depend on the prevailing exchange rate in March 2022.
When the swap auction was announced, banks were expected to make bids at lower forward premiums. However, that was not necessary as the forward premium rates dropped by about Rs.2 from Rs.9.70 right after the announcement. The significant reduction in the rate was acceptable to the banks planning to participate in the auction.
Several banks made bids during the auction in order to stock up rupees in advance as a credit offtake is expected towards the end of the month and after.
Though the swap deal is found to be a good liquidity management tool, the possibility of more such auctions cannot be ascertained. This is so because the exchanges will make the RBI liable in the future, which might add pressure to the regulator’s balance sheet. Unless the liquidity situation is well balanced, the RBI will face a major impact at the time of maturity of these exchanges.
An additional benefit of the swap deal is the reduction of hedge costs for those who import. The decrease in the costs can be estimated due to the fall in the three-year Mumbai Interbank Offered Rate (MIOR) by 70 basis points.
Source: Economic Times