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Dollar-rupee swap to suck out liquidity, support forex market

Currently, the liquidity is expected to be in surplus of around Rs 7.75 lakh crore.

Dollar-rupee swap to suck out liquidity, support forex market
Swap auction is expected to withdraw approximately Rs 38,000 crore – a very small amount considering the huge surplus. But, it will have an impact on short-term rates, dealers said. Considering the current scenario, the swap auction is well planned to support exchange rate volatility caused due to global cues.

By Manish M Suvarna

The buy-sell auction announced by the Reserve Bank of India (RBI) for the dollar-rupee, to be held on March 8, is aimed at managing surplus liquidity in the banking system and enhance supply of dollars in the foreign exchange market.

Withdrawal of surplus liquidity from the banking system is expected to help the RBI conduct open market operation (OMO) purchases to anchor yields on government securities which have risen sharply since the announcement of higher borrowing figures and a sharp rise in prices of Brent crude oil. Currently, the liquidity is expected to be in surplus of around Rs 7.75 lakh crore.

When RBI sells dollar, it sucks out rupee liquidity from the banking system. This could be rebalanced with OMO bond purchases which will help replenish liquidity as well as act as an anchor to bond yields. It remains to be seen how consistently and for what amount the RBI does such sell-buy swaps,” said Lakshmi Iyer, CIO (debt) and head – products, Kotak Mahindra Asset Management Co.

Swap auction is expected to withdraw approximately Rs 38,000 crore – a very small amount considering the huge surplus. But, it will have an impact on short-term rates, dealers said. Considering the current scenario, the swap auction is well planned to support exchange rate volatility caused due to global cues.

In this auction, banks will buy $5 billion from the RBI, and at the same time, sell the same amount at the end of the period. The auction based on multiple prices and successful bids will be accepted at their respected quoted premiums.

With this auction, the RBI will sell dollars to the spot market and make a two-year contract to buy these dollars from the forward market. This contract will offset some pressure from the central bank because it is holding forward contracts. At the time of maturity, the RBI needs to buy dollars which will put pressure on the rupee.

As per data, RBI has a net forward book of $49 billion. Of this, $47 billion is maturing between three months and one year. One more or two swap auctions will help extend the maturity of a part of this forward contract,” said Kunal Sodhani, AVP, global trading centre, Shinhan Bank.

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First published on: 03-03-2022 at 01:00:00 am