reserve Bank of India
The Reserve Bank of India (RBI)’s dollar/rupee buy/sell swap auction held on Tuesday received an overwhelming response, with bids almost double the announced amount. According to RBI, the central bank received bids worth $9.80 billion, but it accepted bids of only $5 billion at a cut-off premium of 910 paise. The announced amount of the auction was 5 billion dollars. The release said that RBI received 254 bids in the auction and accepted 144 bids. The bid-to-cover ratio stood at 1.96.
Auction will be held in two phases
RBI said that the partial allotment as a percentage of competitive bids at the cut-off premium stood at 18.10 per cent. The first phase of the auction will take place on May 29, and the second phase – which is the phase of withdrawal of funds – will take place on May 29, 2029. In the first phase of the transaction, banks will sell US dollars to the Reserve Bank of India at the FBIL reference rate on the date of auction. The settlement of the first tranche of the swap will be on ‘on-spot’ basis from the date of the transaction.
In this, the Reserve Bank of India will deposit rupees in the current account of the successful bidder, and the bidder will have to deposit US dollars in the Nostro account of RBI. In the reverse leg of the swap transaction, to get back the US dollars, the rupees have to be returned to the Reserve Bank of India along with the swap premium. According to RBI data, liquidity in the banking system is estimated to be in surplus by about Rs 67,285.42 crore as of May 25.
trying to save money
The swap comes at a time when the central bank is trying to save the rapidly depreciating rupee by selling dollars from its forex reserves. Such a step may reduce the liquidity of the rupee in the country’s banking system and increase interest rates. Through the initial phase settlement of swaps to be held on Friday, the Reserve Bank of India will inject rupee liquidity back into the banking system. This swap will be reversed after three years. So far in the month of May, the liquidity surplus in India’s banking system has averaged less than Rs 2 trillion ($20.93 billion), which is less than 0.8 percent of total deposits.
Rupee had fallen to record level
The Indian currency has continuously fallen to new record lows, including an all-time low of 96.96 against $1 last week. Due to the intervention of the Central Bank and the fall in oil prices, it improved slightly and reached the level of around 95.50. Meanwhile, the bond yield curve flattened as short-term rates had already factored in the possibility of interest rate hikes—perhaps as early as June—while longer-term rates had yet to reflect these expectations. Following the announcement of the auction results, long-term dollar-rupee forward premiums declined. The three-year forward premium was last seen at Rs 9, down from around Rs 9.25 before the results.
