Large banks preparing for maturity of RBI’s $5 billion forex swap

Large Indian banks are preparing for a $5 billion forex swap maturing next week by accumulating dollars, with the trading pattern suggesting that lenders do not expect the swap to be rolled over, traders said on Wednesday.

The $5 billion dollar/rupee swap that the Reserve Bank of India undertook in April 2022 will mature on Monday, meaning $5 billion can potentially be taken out of the banking system, fuelling a potential dollar shortage.

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In anticipation of this shortage, large banks are raising dollars by conducting USD/INR buy/sell swaps in which they will receive dollars on the spot date (in two working days) and have access to them for the tenure of the contract.

“In the run-up, banks will want to take steps that they do not face a dollar crunch. That is why we are seeing significant demand (for buy/sell swaps),” said Sakshi Gupta, principal economist at HDFC Bank.

This demand has pulled down one-month rupee forward premiums to near 7 paisa, from 12 paisa late last month, which, in yield terms, is a decline of about 60 basis points.

The forex head of a private bank said the implied rupee yield, based on the 1-month forward, is lower than the domestic rupee rate, which signifies demand for the buy/sell swaps.

The RBI can, instead of allowing the swap to mature, opt to roll over to avoid the possibility of a dollar shortage.

But bankers do not expect that to happen.

HDFC’s Gupta said a rollover was unlikely since the RBI had conducted the swap for a specific reason in the first place.

The RBI had said it was doing the swap to elongate the maturity profile of its forward book and smoothen the receivables relating to forward assets.

“The maturity has (rupee) liquidity implications, but the RBI has sufficient tools to take care of that,” Gupta said.

Two senior officials at large public sector banks, one of which markets believe had participated in the swap, concur that had it wanted to do so, the RBI would have already rolled over the swap.

IDFC First Bank economist Gaura Sen Gupta said it was possible the central bank could “allow the swap to mature … and replace it with sell/buy swaps of lesser maturity.”

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