RBI Taps $4-5 billion Forex Swap To Ease Liquidity
The RBI sells dollars and receives rupees now, which adds rupees to the banking system. Later, the RBI will buy back the dollars on a pre-decided date. This helps stabilise the currency when the rupee is under pressure
Mumbai: The Reserve Bank of India (RBI) may have conducted around $4-5 billion in forex swaps over the last three days to offset the drain in liquidity caused by spot dollar sales.
A dollar-rupee swap is a way for the RBI to inject liquidity without permanently increasing rupee supply. The RBI sells dollars and receives rupees now, which adds rupees to the banking system. Later, the RBI will buy back the dollars on a pre-decided date. This helps stabilise the currency when the rupee is under pressure.
The rupee on Wednesday had faltered to a new low of 91.7425 as heightened tensions between United States-European Union over Greenland tariffs, Japan bonds sell off, sustained FPI outflows and US-India trade frictions kept the currency under pressure. The pace of rupee depreciation has been so aggressive that a weak dollar index and intermittent dollar selling by the RBI failed to provide a meaningful floor. Elevated dollar demand from importers particularly those dealing in precious metals also exacerbated the rupee's slide.
Says Anil Bhansali, head of treasury at Finrex Trading Advisors, "They are doing spot over June. The swap is happening over the last three days (since Tuesday) to infuse liquidity in the banking system. The way, the near term forward premiums have fallen by 30-35 basis points over the last three days gives a sense that the swap would be around $4-5 billion. Yesterday, the near term forward premium was 3.10 (on an annual basis) and today the forward premium is 2.70."
According to Reuters, over the past two days, about $2 billion has been put into circulation as a result of dollar spot sales. Forward premium is the interest rate differential between the one-year treasury bill in India and one year US treasury yield.
When banks sell dollars, it creates a flow of dollars into the banking system, but when FX swaps are executed, rupees are taken out of circulation, and the banks with dollar/rupee payments must have a corresponding flow of dollars and rupees to create a balanced account.
According to Reuters, bankers are reporting swap activity on Tuesday and Wednesday across different maturities, with one estimate of over $3 billion traded. Both days had above-average trading volumes. On Wednesday, banking liquidity reached a Rs 6000 crore depletion.
The RBI has stepped up spot market intervention as the rupee faces pressure from equity outflows, higher demand linked to bullion imports, and increased hedging activity.
