The Reserve Bank of India (RBI), perhaps for the first time in many years, has booked dollar/rupee forwards exceeding one-year tenure of up to $3.04 billion during July and August, data from the central bank showed.
This could be a hedge for the dollar outflows that would arise as special swaps with banks mature after September 2016. In September 2013, the central bank had prodded banks to raise dollars through foreign currency non-resident deposits and capital by giving them attractive swap rates to bring in the dollars. This move was to counter the massive dollar outflows that dragged the rupee to an all-time low of 68.85/$ in August and to stabilize the currency as well.
“It is a calibrated approach by the RBI to avoid volatility when the FCNR unwinding takes place. Considering these will take place from September 2016 onwards, the RBI is hedging for beyond the tenure,” said NS Venkatesh, executive director and chief financial officer at IDBI Bank.
In such a swap arrangement, a commercial bank would raise dollars through foreign currency deposits with minimum three-year tenure and swap the dollars so raised with the RBI at a discounted swap rate of 3.5% per annum. The prevailing swap rate at that time was around 7%. Since the swap tenure would match the tenure of the deposits, most of these swaps are due to mature from September 2016 onwards.
This swap arrangement garnered $34 billion for the RBI. Separate data released last month show that the RBI’s interventions have shifted to the forward market from the spot.
In July, the RBI had an outstanding forward position of $4.6 billion, an increase of $2.7 billion over the previous two months. Surplus liquidity in the banking system could be one of the motivations for the RBI to intervene more in the forward market as intervention in the spot market tends to increase liquidity immediately. Since July, banks have turned net lenders to the RBI through various reverse repo tenders from being net borrowers earlier. Banks have parked on an average around Rs 40,000 crore with the central bank through reverse repo tenders.