RBI To Conduct Sell/Buy Forex Swaps Worth $5 Billion
With a view of elongating the maturity profile of its forward book, the RBI will conduct a sell/buy swap auction.
The Reserve Bank of India will conduct $5 billion in sell/buy foreign exchange swaps. The swaps will be for a period of two years, with the auction scheduled for March 8.
"With a view to elongating the maturity profile of its forward book and smoothen the receivables relating to forward assets, it has been decided to undertake sell/buy swap auction of $5 billion on March 08, 2022," the central bank said in a release on Monday.
As part of a sell/buy swap, banks can buy U.S. dollars directly from the RBI and agree to sell them back at the end of the swap period, in this case two years.
The RBI has been intervening heavily in the forwards market over the last two years as it tried to sterilise foreign inflows to prevent the currency from appreciating quickly. To avoid adding to already surplus domestic liquidity, it shifted intervention from the spot market to the forwards market.
As of December, the latest data available, RBI had a net forward book of $49 billion. Of this, $47 billion in forwards were maturing between three months to one year. The two-year swap auction will help extend the maturity of a part of this.
"Net delivery of its forex long position would have led to consequent increase in RBI’s forex asset in its balance sheet and thus rupee liquidity to the equivalent amount, at the time when it is trying to keep system liquidity well managed," said Madhavi Arora, lead economist at Emkay Global. "It looks like the RBI intends to roll over their position without disturbing the markets around fiscal year-end."
The swap auction will also have implications for domestic liquidity. As banks buy dollars from the central bank, rupee liquidity gets sucked out. This may create some room for the central bank to buy bonds to support the government securities market, said the head of a bank treasury, speaking on condition of anonymity.
"The forex swap tool would also prepare RBI to manage the gush of dollar flows ahead of the LIC IPO and other smaller IPOs lined ahead in the coming month(s) amounting to $15-18 billion," said Arora, adding that this option could be used tactically by the RBI as one of the tools to smoothen banking system liquidity.