Forex swap maturity: Banks get ready to return $5 billion to RBI

With $5 billion forex swap between the Reserve Bank of India (RBI) and banks set to mature today, a majority of lenders have arranged for dollars to be delivered to the RBI.

In April last year, the RBI conducted a dollar/rupee (USD/INR) sell-buy swap auction for an amount of $ 5 billion. Under the swap, the central bank sold dollars to banks with an agreement to buy back those dollars at maturity, which is October 23.

“The market is completely covered (arranged dollars to deliver to the RBI). I don’t see any issue,” said a forex market dealer.

The absorption of $5 billion forex swap by the RBI will release Rs 40,000 crore of rupee liquidity into the banking system.

Higher demand for dollars created some temporary dollar liquidity shortage in the banking system. In order to meet their dollar demand, banks, in the last few days, bought dollars under USD/INR buy-sell swap either from the interbank market or from exporters or other forex market participants to deliver dollars to the RBI. These swaps are of shorter tenure with maturity of one to two days.

Forex dealers said it is the RBI which is supplying dollars to the market through select banks.

Though banks are expecting the forex swap to mature today, they are not certain how the RBI is going to take the delivery of dollars.

Some market participants feel that the central bank may stagger the absorption of dollars over a few days so that banks do not have to supply the entire $5 billion in one go.

Spreading of the dollar delivery will not exert pressure on the rupee. This will also mean that the entire Rs 40,000 crore rupee liquidity will not come back to the system in one day.

The RBI has been maintaining that it does not want excessive liquidity in the system as it can pose risks to both price and financial stability.

Bankers said that even if the Rs 40,000 of rupee liquidity comes back to the system today, the RBI can use instruments such as variable reverse repo rate auction or OMO-sales (open market operations sales) to manage liquidity.

“Today, we are in a very odd situation where we have a significant durable liquidity surplus but a frictional liquidity deficit. From a frictional liquidity perspective, Rs 40,000 crore of rupee liquidity will make it neutral but from a durable liquidity perspective, this will increase the excess durable liquidity. So, whether the RBI is going to look more closely at the durable liquidity or frictional liquidity, will determine its action,” said a banker.

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The RBI had announced the forex swap last year to elongate the maturity profile of forward book and smoothen the receivables relating to forward assets. This also supported the rupee which came under pressure due to the Russia-Ukraine conflict.

The announcement to conduct the said swap came at a time when the Russia-Ukraine caught policymakers and central banks worldwide caught off-guard. In the immediate aftermath of the war, global commodity prices increased led by oil, and global financial markets too saw heightened volatility.

“A flight to safety ensued which put pressure on EM currencies such as India. Hence, while the announcement for the auction was said to be to adjust the maturity profile of RBI’s forward book, it also had an impact on the exchange rate,” said a Bank of Baroda report. With the maturity of the swap approaching this week, it is almost ironical that the world has once again found itself in the midst of another unforeseen crisis in the form of the Israel-Hamas war, it said.

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The absorption of $5 billion forex swap by the RBI will release Rs 40,000 crore of rupee liquidity into the banking system.Hitesh Vyas is an Assistant Editor with The Indian Express. He has over 18 years of experience in financial journalism. Based in Mumbai, he reports on a wide range of sectors, including banking, NBFCs, […] … Read More

First published on: 23-10-2023 at 02:27 IST

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