RBI to conduct another sell/buy swap for $5 bn, likely to achieve three goals

“With a view to elongating the maturity profile of forward book and smoothen the receivables relating to forward assets, it has been decided to undertake a sell/buy swap auction of $5 billion on April 26, 2022,” the central bank said late Tuesday.

This means the central bank will sell dollars in the spot market at a specified rate, only to buy from the forwards. It will have simultaneous forwards with the same entity.

A bank participating in such an auction window will return the dollars after one and a half years, the contract period offered by the RBI via this window in this case.

According to the latest RBI data, a net of $4.27 billion long forwards contracts will mature until April end.

“The central bank does not want to take deliveries of its long forwards,” said Anindya Banerjee, currency analyst at Kotak Securities. “At the same time, such a swap window will help suck out excess rupee liquidity from the banking system.”

Had the RBI taken deliveries of those dollars, it would have created a dollar demand in the market, sending the rupee lower.

The minimum bid size will be $10 million and in multiples of $1 million thereafter, the RBI said. Eligible participants can also submit multiple bids.

Earlier on March 8, the RBI conducted a sell/buy swap auction for $5 billion, a move in line with the central bank’s plans of gradual liquidity drainage.

The banking system now has surplus cash of around Rs 5.90 lakh crore, compared with Rs 7.22 lakh crore on March 8.

Any sell/buy swap also helps balance forwards premium, the cost of covering exchange rate risk.

“Sell/buy swap window deters speculators from shorting the rupee aggressively against the dollar,” said Abhishek Goenka, CEO at IFA Global. “Volatility in the spot market will likely be cut due to this action.”

Sustained lower forward premia hurts exporters but importers find it lucrative as they can cover their offshore liabilities at a cheaper rate.

Exporters receive the premium. For example, if an exporting company considers 25 paise premium over 74 rupee a dollar in the next one month against an offshore receivable, it will receive Rs 74.25. Any lowering of premia will cut its realisations.