Mumbai: The Reserve Bank of India (RBI) on Tuesday conducted its second successful dollar swap auction of $5 billion, receiving bids worth $18.65 billion, or more than three times what was on offer. Unlike the last time, RBI accepted bids from a small number of bidders.
The central bank accepted bids at a premium of ₹8.38 which works out to an annualized rate of 4.01% from authorized dealers and paid them rupees in return. Effectively, RBI has infused ₹34,874 crore worth of liquidity into the banking system in exchange for dollars, the central bank said in a press release.
After three years, RBI will buy back the same amount of dollars at the premium offered in Tuesday’s auction.
While the regulator received 255 offers, it accepted only five among them. In contrast, in the first auction, the central bank had accepted 89 of the 240 bids offered.
“There is a good possibility companies which have borrowed in ECB (external commercial borrowings) must have swapped in dollar through RBI window to borrow rupees. Companies in particular NBFCs which have a diversified funding profile through this auction would have swapped dollars to RBI. That would have accounted for the chunky nature of the bids," said Harihar Krishnamoorthy, head of treasury operations at FirstRand Bank. In the first auction, RBI had bought dollars totalling $5.02 billion at a premium of ₹7.76, which works out to an annualized rate of 3.76%.
Ashish Vaidya, head of trading at DBS Bank in Mumbai, termed the auction result surprising. “A large player has played a pivotal role in this auction. The hedging points to an expectation that there could be massive rupee depreciation or that local rates could go up significantly," he said.
Market players are now expecting forward levels to go up by 25 basis points because the swap was taken by a few players and the broad market will have to come to the market to meet their requirements.
Separately, the central bank said it will purchase government securities against infusing liquidity worth ₹12,500 crore through open market operations (OMO).
Swaps are part of the liquidity management framework and have been used regularly. They are also part of special programmes to sterilize the liquidity effects of forex intervention.
The rupee closed at 69.63 on Tuesday, up 0.06% from Monday’s closing. RBI’s announcement of OMO auctions in May, after Tuesday’s forex swaps, is a judicious use of instruments to achieve multiple objectives, said Saugata Bhattacharya, chief economist at Axis Bank. By signalling an intent to provide durable liquidity as needed, it will likely facilitate transmission of repo rate cuts into lending rates.