RBI announces second $5 bn dollar-rupee swap auction on April 23
BusinessToday.In April 2, 2019
In a bid to further ease liquidity ahead of upcoming general elections, the Reserve Bank of India on Monday announced a second round of dollar-rupee swap auction in less than a month to inject another $5 billion (about Rs 34,500 crore) into the banking system.
This development comes amid reports of a widening liquidity deficit situation. According to Care Ratings, going by the net outstanding liquidity, "the average liquidity deficits for the week [March 18-22] at Rs 75,653 crs [crore] was at a 3-week high and double that of the previous week". During 2018, foreign portfolio investors reportedly withdrew a record Rs 83,000 crore from equity and debt put together. That is where the liquidity crunch started and the NBFC crisis in the second half of the year only made matters worse.
"In order to meet the durable liquidity needs of the system, the RBI has decided to inject Rupee liquidity for a longer duration through long-term foreign exchange Buy/Sell swap in terms of its extant Liquidity Management Framework," the RBI said in a statement yesterday, adding that the dollar-rupee swap auction of $5 billion for the tenor of three years will be held on April 23, 2019.
Under the swap, banks will sell US dollars to the central bank and simultaneously agree to buy the same amount of greenbacks at the end of the swap period, which, in this case, is three years. The dollar amount mobilised through this auction would also reflect in the RBI's foreign exchange reserves for the tenor of the swap while also reflecting in RBI's forward liabilities.
The apex bank's new tool for liquidity management was deployed for the first time last Tuesday, when it held the first-ever such auction - the RBI accepted $5.02 billion of the currency tendered by banks and, in turn, Rs 34,561 crore was infused into the banking system. The RBI said in a statement that it had received $16.31 billion in bids for the auction for which the cut-off was set at Rs 7.76. This meant that the banks that sold dollars to the RBI would get to buy back their greenbacks in 2022 at an exchange rate that includes the above cut-off premium, irrespective of the prevalent exchange rate at the time.
Like in the first round, the upcoming swap auction will bulk up India's foreign exchange reserves while injecting liquidity into the financial system to ease a cash crunch typically seen before the beginning of a financial year. It is meant to give RBI greater flexibility in managing banking system cash while helping soak up any potential large dollar inflows that could make the rupee rise sharply. The Rs 42,000 crore purchase of Essar Steel by ArcelorMittal is a case in point, once the company's Committee of Creditors (CoC) manages to reach a consensus on distributing the proceeds between the company's operational and financial creditors. Furthermore, experts believe that it can soften short-term interest rates.
According to the RBI, the market participants would be required to place their bids in terms of the premium that they are willing to pay to the RBI, expressed in paisa terms up to two decimal places. The April auction will be a multiple-price based auction - successful bids will get accepted at their respective quoted premium. The minimum size of each bid is $10 million and in multiples of $1 million thereafter.
Till March 22, the RBI had already infused liquidity to the tune of about Rs 3 lakh crore by way of Open Market Operations (OMOs) purchases, of which Rs 732 crore were not via auctions. According to IIFL, the RBI has already absorbed 75% of the government's bond issuances in this fiscal and that is was one of the reasons it has now turned to the dollar-rupee swap auction route.
With PTI inputs