RBI to infuse liquidity via $5 billion dollar rupee swap auction on May 26

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The auction will be held on May 26.

“On a review of current and evolving liquidity conditions, it has been decided to conduct a USD/INR buy/sell swap auction of $5 billion for a tenor of three years,” the central bank said in a circular.

This comes on the backdrop of around 6% depreciation of the local currency since the beginning of the Iran wao on February 28. The rupee on Wednesday saw a new closing low of 96.83 a dollar after recovering a bit from the all time low of 96.96 a dollar. In the one-year forward market, the rupee was seen traded over 100 a dollar.

“The dollar-rupee swap is expected to cool down the forward premium from the recent highs, besides improved rupee-liquidity in the banking system” an economist with a foreign bank said.
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The dollar-sell swap move will also boost the country’s forex reserves, he added.

The RBI has been digging its foreign exchange reserves to sell dollars to reduce the rupee volatility. The reserves stood at $696.988 billion at the end of May 8, ass compared to its all-time peak of $728.49 billion seen on February 27,

This will be the first dollar-sell swap by the central bank amid the geopolitical conflict, which started on February 28. It had done two such swaps of $10 billion each on February 4 and January 13,

The swap will be in the nature of a simple buy/sell foreign exchange swap from the Reserve Bank side. Banks will sell dollars to the central bank and simultaneously agree to buy the same amount at the end of the swap period.

The auction cut-off would be based on the premium amount in paisa terms up to two decimal points. The market participants would be required to place their bids with the premium that they are willing to pay to the RBI for the tenure of the swap expressed in paisa terms up to two decimal places. Successful bids will get accepted at their respective quoted premium, the central bank said.
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