The Reserve Bank of India (RBI)’s forex swap auction held on Monday received strong responses, with the apex bank receiving bids worth $22.28 billion from banks, against the notified amount of $10 billion. The three-year forex swap is expected to inject nearly Rs 85,000 crore of liquidity in the banking system.
“By conducting forex swap auctions, the RBI is offsetting the liquidity tightening caused by its interventions,” said V Ramachandra Reddy, head of treasury, Karur Vysya Bank. “These swaps infuse durable liquidity in the banking system.”
The RBI set the swap’s cut-off premium at Rs 5.86, lower than Rs 6.55 set for the auction of a similar size and duration held late last month. The settlement of Monday’s auction will take place on March 26 and 27.
This was the third dollar-rupee swap auction by the RBI in the past two months. The first auction of $5 billion for a tenure of six months was conducted on January 31. The second auction of $10 billion, which was held on February 28, witnessed strong response from banks, with the RBI receiving bids worth $16.23 billion.
The swap involves the apex bank purchasing dollars from banks against the rupee while contracting to sell the greenback at a future date. When the central bank buys dollars, it injects an equivalent quantum of rupee liquidity.
Despite measures taken by the RBI, liquidity deficit has not significantly eroded – it still hovers above Rs 2 lakh crore and reached Rs 2.06 lakh crore on Friday.
The RBI will conduct OMO purchases of government securities worth Rs 50,000 crore on Tuesday. “We are expecting strong response from banks to OMO auctions. Bond yields have eased significantly over the past one year and banks are likely to book profit by selling government securities in these auctions,” said a senior bank official.
The RBI has introduced several measures, including lowering the cash reserve ratio, daily variable rate repo (VRR) auctions, long-term repo auctions, forex swaps and OMO purchases, to ease the liquidity stress. It is conducting forex swaps and OMO purchase to inject durable liquidity while VRR auctions are being held to infuse short-term cash in the banking system.
