RBI to take steps to infuse liquidity

  • In first leg of the transaction, RBI will buy dollars in the spot market from dealers in exchange for the rupee
  • During the current fiscal year, the central bank has injected over 2.36 trillion worth of liquidity

New Delhi: In a move to infuse liquidity into the market, the Reserve Bank of India (RBI) on Wednesday said it will conduct a three-year buy-sell swap for the rupee through an auction process. RBI will buy $5 billion on 26 March for a period of three years and reverse it through sales at pre-determined rates fixed via auction.

Authorised dealers are allowed to participate in the auction, an RBI press release said. In the first leg of the transaction, the central bank will buy dollars in the spot market from them in exchange for rupees.

“The US dollar amount mobilized through this auction would also reflect in RBI’s foreign exchange reserves for the tenor of the swap while also reflecting in RBI’s forward liabilities," it said.

During the current fiscal year, RBI has injected more than 2.36 trillion worth of liquidity through open market operations (OMOs).

“Having purchased substantial amounts of G-Sec bonds through OMOs, RBI is now looking to use USD-INR buy/sell swaps as another tool to infuse rupee liquidity. The size ($5 billion) and tenor (three years) of swaps announced is substantial. First, this will be negative for G-Sec bonds, as it potentially reduces the size of RBI OMOs. Second, this could bring down MIFOR and USD-INR cross-currency swap rates, as RBI may have to auction the swap at much lower than current market rates, for this window to be successful. This will reduce the cost of importer hedging, and incentivise fresh ECB borrowings," said Ananth Narayan, associate professor (finance) at SP Jain Institute of Management and Research.

This infusion of liquidity could also be viewed through a political lens. Political parties ideally like the financial system to be surplus liquidity in times of elections, but experts say it is also likely that this route is being adopted to insulate bond yields, broader interest rates and the fisc. 

Close