RBI Secures Nearly Double the $5 Billion in Foreign Exchange Swap Subscription

Reserve Bank of India's Dollar/Rupee Buy-Sell Swap Draws Strong Demand

The Reserve Bank of India's three-year dollar/rupee buy-sell swap auction received strong demand on Tuesday, with bids of nearly $10 billion, almost twice the size of the auction. The central bank accepted 141 bids, with the premium cut-off set at 9.10 rupees. This comes at a time when the Reserve Bank of India is continuing to defend a rapidly weakening rupee by selling dollars from forex reserves, which can remove rupee liquidity from the country's banking system and push up interest rates.

The swap is designed to provide liquidity to the banking system, and through the settlement of the initial leg of the swap, scheduled for Friday, the Reserve Bank of India will inject rupee liquidity back into the banking system. The swap will be reversed three years later. This move is aimed at addressing the current liquidity surplus in India's banking system, which has averaged below 2 trillion rupees (approximately $20.93 billion) so far in May, a figure that represents less than 0.8% of deposits.

The Indian currency, the rupee, has fallen to consecutive record lows, including an all-time low of 96.96 per dollar last week. However, it recovered to about 95.50 on the back of central bank interventions and a retreat in oil prices. The bond yield curve has also flattened as short-term rates priced in rate hikes, perhaps as soon as in June, while long-term rates are yet to reflect these expectations.

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The auction results have also had an impact on the dollar-rupee forward market. Far tenor dollar-rupee forward premiums fell after the auction results were announced. The three-year forward premium last stood at 9 rupees, down from about 9.25 rupees before the results.