If the maiden foreign exchange (forex)swap auction was a test case for performance as a tool for liquidity management, the Reserve Bank of India (RBI) just got itself a winner.

The central bank received bids totalling $16.3 billion at the swap auction where it proposed to buy $5 billion from lenders. But this was on expected lines, because banks want to stock up on rupees ahead of a spurt in credit offtake they are expecting in the final days of this month and beyond.

Also, getting a three-year swap deal at a relatively cheaper price makes sense, as the cut-off premium on the swap was set at 7.76 by the central bank. According to forex dealers, this is marginally lower than prevailing market rates.

Needless to say, lenders would want more auctions of such kind. But would the central bank want to oblige?

That would depend on how much of a future liability RBI wants to pile on. Swap deals increase the risk on the central bank’s balance sheet.

Also, these swaps will mature in the month of March in 2022. Unless liquidity management attains perfection, seasonal tightness in March would exacerbate due to these swaps maturing.

Also, as pointed out in this column last week, in late 2016, when swap deals as part of the special scheme of FCNR (foreign currency non-resident) deposits were due, forward premium had risen and the rupee had weakened as lenders had to deliver dollars to the central bank (bit.ly/2Wr03Gz).

Therefore, RBI has to assess whether it’s worthwhile adding on future risks in using this route to infuse liquidity. “I think even if they decide to use it again, they won’t rush it, as swaps always have a cost," said a forex trader at a private sector bank requesting anonymity.

To be sure, the auction has reduced hedge costs for importers, the biggest side benefit. One indicator of this is the 70 basis point fall in the three-year Mumbai Interbank Offered Rate. “It has brought the curve down substantially. But will it sustain, I don’t know," said Jamal Mecklai, chief executive officer at Mecklai Financial Services Pvt. Ltd. The reference is to the forward currency rate at various tenures, which have come down substantially.

With the swap auction behind, forward premia are likely to follow market dynamics. The dollar’s drop globally augurs well for hedge costs for now.

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