The Reserve Bank of India (RBI) has announced a USD/INR buy/sell swap auction worth $5 billion for a three-year tenor, scheduled for May 26. This move aims to address the evolving liquidity conditions and stabilize the Indian rupee, which has depreciated by around 6% since the onset of geopolitical tensions on February 28.
The rupee recently hit a new closing low of 96.83 per dollar, recovering slightly from an all-time low of 96.96. In the one-year forward market, it was trading above 100 per dollar. The swap auction is expected to reduce the forward premium and enhance rupee liquidity in the banking system.
The RBI's decision to conduct this dollar-sell swap is also aimed at bolstering the country's forex reserves, which stood at $696.988 billion as of May 8, down from a peak of $728.49 billion on February 27. This marks the first such swap amid the ongoing geopolitical conflict, following two previous swaps of $10 billion each earlier this year.
“The dollar-rupee swap is expected to cool down the forward premium from the recent highs, besides improved rupee-liquidity in the banking system.”
Economist with a foreign bank
The auction will involve banks selling dollars to the RBI and agreeing to repurchase the same amount at the end of the swap period. Bids will be based on the premium amount in paisa terms up to two decimal points, with successful bids accepted at their quoted premium.
The dollar-rupee swap is anticipated to cool down the forward premium from recent highs, besides improving rupee liquidity in the banking system, according to an economist with a foreign bank. The move will also boost the country's forex reserves, he added.
Background
The RBI has been actively using its foreign exchange reserves to sell dollars and mitigate rupee volatility. The reserves have seen a decline from their all-time high earlier this year, reflecting the central bank's interventions to stabilize the currency.
Looking ahead, market participants will closely watch the impact of the swap auction on the rupee's stability and liquidity conditions. The outcome of the auction could influence future RBI strategies in managing currency volatility and forex reserves.
