MUMBAI – The Indian central bank is likely to take delivery of a $5 billion forex swap maturing next week in the wake of adequate dollar inflows and rupee liquidity staying on the tighter side, a source and four bankers said on Monday.
The Reserve Bank of India undertook a dollar/rupee sell-buy swap in March 2022 that matures next Monday. Taking delivery would pull out $5 billion and inject proportionate rupee liquidity.
“There have been quite a lot of (dollar) inflows, dollar liquidity is not the issue,” a person familiar with the RBI’s thinking said.
“The exchange rate and forward premiums are not a concern either. I don’t see why the RBI shouldn’t go ahead and take the delivery.”
The RBI did not respond to a request seeking comment.
Inflows into the debt market have aided dollar liquidity, with foreigners pouring in $3.8 billion into bonds in February.
The final few weeks of India’s fiscal year ending March 31 typically see higher capital inflows and should further help keep dollar liquidity aflush.
Dollar liquidity was an issue when a similar swap matured in October last year, reflected in the drop in the dollar/rupee forward premiums.
However, the March forward premium is at 4.50 paisa a week before this contract’s maturity, only slightly lower, on a per-day basis, than the overnight dollar/rupee cash swap rate.
Taking delivery of the FX swap would infuse around 400 billion rupees but cash outflows towards direct taxes are expected to ensure a sustained deficit in the system.
India’s banking system liquidity deficit stands at 400 billion rupees ($4.83 billion) from over 2 trillion rupees last week.
The RBI can choose to roll over the swap instead of letting it mature by conducting sell-buy swaps for short maturities, but that is not seen as a likely outcome.
“The RBI may choose to follow the policy of taking delivery of the dollars, which will help them manage the domestic liquidity situation,” said Madan Sabnavis, chief economist at Bank of Baroda.
The situation right now is much more comfortable, relative to last October, “so this (swap maturity) should sail through,” the person familiar with the central bank’s thinking added.
