14 Mar 2019

RBI Long Term USD/INR Swap – Effect on Markets

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RBI announced a Long Term USD/INR Buy – Sell swap auction as a liquidity management tool. This is the first time RBI has explicitly stated that it will use fx operations for liquidity management.

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Arjun Parthasarathy

RBI announced a Long Term USD/INR Buy – Sell swap auction as a liquidity management tool. This is the first time RBI has explicitly stated that it will use fx operations for liquidity management. The swap on an immediate bases adds liquidity into the system and also adds to RBI’s fx reserves. However, as it is a swap, RBI has created a long term liability where it has to give the USD back to banks and hence on a net basis, there will be no change in fx reserves. The forward liability of RBI will be reflected in the outstanding forward position while the spot transaction will be reflected in RBI fx purchases.

The USD/INE swap is for a 3 year maturity period for USD 5 billion. Banks will sell to RBI at current spot rates, which as of today is Rs 69.60. Banks will sell to RBI USD 5 billion and will receive Rs 340 billion in liquidity.

At maturity, RBI will sell to banks USD 5 billion in return for INR. The forward rate will be spot rate Rs 69.60 plus the forward premia, which will be determined in the auction. Forward premia will be cost of the current liquidity, which would be 3-year borrowing cost for the banks.

Swap Effects on the Market

The swap will create a demand for USD as RBI is buying spot and if there USD flows are weak, the INR will depreciate against the USD. However, if flows are strong, then INR may not witness much depreciation. The market reaction to the swap announcement was muted, with the INR actually strengthening against the USD, indicating that the flows are strong.

The market will see long term liquidity infusion and this will help money markets and bond markets and yields can fall if other factors are supportive of yields.

RBI will have more room to participate in the forward markets as it has created a long term forward sale of USD and it can hedge the position periodically by creating positions of different maturities. The swap can also improve the liquidity on the long term forward markets, liquidity is usually concentrated in the 1 year and below maturity segments in the forward markets.

RBI USD/INR Swap Auction

To infuse durable liquidity RBI has decided to conduct longer duration  foreign exchange Buy/Sell swap auction.The USD amount mobilized through this auction would reflect in RBI’s foreign exchange reserves for the tenor of the swap and in RBI’s forward liabilities. USD/INR Buy/Sell swap auction of USD 5 billion for tenor of 3 years will be conducted on 26th March 2019.

Operational flow is given below –

·         Authorised Dealers (ADs) – category-1 banks are eligible to participate in the auction.

·        The swap is a simple buy/sell foreign exchange swap from the Reserve Bank side. A bank to sell USD to the RBI and simultaneously agree to buy the same amount of USD at the end of the swap period.

·        Under the swap auction, minimum bid size is USD 25 million and in multiples of USD 1 million thereafter. The eligible participants are allowed to submit multiple bids.

·        In the first leg of the transaction, the bank to sell USD to the RBI at FBIL Reference Rate of the auction date. The settlement of the first leg of the swap will take place on spot basis from the date of transaction and the Reserve Bank will credit the Rupee funds to the current account of the successful bidder and the bidder needs to deliver US Dollars into the RBI’s nostro account. In the reverse leg of the swap transaction, Rupee funds have to be returned to the RBI along with the swap premium to get the US Dollars back.

·        The auction cut-off is 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 tenor of the swap expressed in paisa terms up to two decimal places. Successful bidders are those who have placed their bids at or above the cut-off premium. All bids lower than the cut-off premium are rejected.

·        There is provision of pro-rata allotment should there be more than one successful bid at the cut-off premium.

·        The banks can be exempted from the ISDA requirements for the purpose of these swaps.



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