The Reserve Bank of India (RBI) successfully concluded a $5-billion dollar/rupee swap maturing on Monday, infusing over Rs 40,000 crore of durable liquidity into the financial system. This move, intended to fortify foreign exchange reserves, comes amid sustained dollar flows and tight liquidity conditions, prompting the central bank to opt for the delivery of the swap.
A sell/buy foreign exchange swap involves a bank purchasing US Dollars from the RBI and agreeing to sell the same amount of US Dollars at the end of the swap period. With the RBI choosing not to roll over the swap, banks receive Rupee liquidity, while the RBI gains Dollar liquidity.
The durable liquidity injection is expected to persist in the banking system for an extended period, addressing short-term relief from liquidity shortages.
The swap
The RBI had initially conducted a dollar/rupee sell-buy swap auction on March 8, 2022, for a notified amount of $5 billion. In a dollar/rupee sell-buy swap deal, the RBI sells dollars to banks with an agreement to repurchase them at a later date. The central bank had the flexibility to choose between taking delivery of the swap, rolling it over entirely, or opting for a partial rollover.
Experts suggest that liquidity tightness and continuous dollar inflows likely influenced the RBI’s decision to take delivery, either partially or fully. This comes as forward premiums rebounded following a week of decline.
While last week saw some relief from liquidity shortages in the banking system, caution is warranted as advance tax and GST-related outflows, anticipated around March 15 and March 20, respectively, are expected to strain liquidity once again, with an estimated Rs 2.5 trillion outflow from the banking system.
The RBI had conducted the 2-year $5 billion sell/buy swap on March 8, 2022, receiving bids for funds totalling $13.565 billion and allocating $5.135 billion. The settlement dates for the first and second legs of the swap were March 10, 2022, and March 11, 2024, respectively.
