The Reserve Bank of India (RBI) on Thursday introduced a US dollar sell/buy swap allowing banks to buy dollars from the central bank to be swapped after six months. The swap would be conducted on March 16, the RBI said. To begin with, the central bank is conducting $2 billion of dollar sell/buy swaps. Foreign portfolio investors (FPIs) have been pulling out money from Indian equity markets leading to a crunch in dollar liquidity and a depreciation of the rupee. On Thursday, the rupee closed at 74.25 to the dollar.
FPIs have pulled out a whopping $5 billion in 13 consecutive sessions from the equity markets and are net sellers at $1.3 billion so far. They sold over a billion dollars of debt on Wednesday and are net sellers of bonds this year at $2.76 billion.
MV Srinivasan, vice-president, Mecklai Financial Services, said the central bank was probably attempting to pre-empt a very steep fall in the value of the domestic currency. “The dollar sell/buy swaps will calm the forex markets as the central bank steps in to provide the requisite dollar liquidity in the wake of the FPI outflows. We could see even more of these swaps going further if the situation demands,” Srinivasan said.
Experts say the move will definitely calm the frayed nerves in the forex market where dollar liquidity has been a concern in recent times. “Mismatches in US dollar liquidity have become accentuated across the world. On a review of current financial market conditions and taking into consideration the requirement of US dollars in the market, it has been decided to undertake six-month US dollar sell/buy swaps to provide liquidity to the foreign exchange market,” the RBI said.
The RBI stated that it is closely and continuously monitoring the rapidly evolving global situation and spillovers. “It stands ready to take all necessary measures to ensure that the effects of the COVID-19 pandemic on the Indian economy are mitigated, and financial markets and institutions in India continue to function normally. The level of forex reserves at $487.24 billion as on March 6, 2020 remains comfortable to meet any exigency,” the RBI said.
Manish Wadhawan, managing partner at Serenity Macro Partners, told FE that the rupee has come under pressure in the past two weeks on account of the relentless selling by FPIs in debt and equity markets. “It has also been exasperated due to the unwinding of rupee long trades in the offshore market on account of the risk-off sentiment. The premia in the offshore rupee forwards has been going higher over the last few days. With the RBI coming out with USD sell/buy swaps, it will bring the onshore premia down and will eventually bring down the offshore premia. Besides intervening in spot, this step shall help stabilise the forex markets. The RBI can definitely do more of these swaps and I believe we can see at least $5 billion of these swaps,” Wadhwan said.
Indeed, the spread between the one-month rupee non-deliverable forwards (NDF) and the one-month rupee onshore forwards had hit as high as 88 paise last week and has remained close to 80 paise this week. Meanwhile, the rupee fell by 57 paise to close at a 17-month low of 74.216 against the dollar on Thursday.