A US dollar-Indian rupee sell/buy swap auction of $5 billion will take place on March 8, the Reserve Bank of India (RBI) has announced. This move is likely to help in levelling the rupee liquidity in the system ahead of the Life Insurance Corporation of India (LIC) IPO, which could lead to a gush of US dollar inflow, experts told Financial Express.

What is a sell/buy swap auction?

In a sell/buy swap auction, a bank buys US dollars from the RBI in exchange for Indian rupees and simultaneously agrees to sell the same amount of USDs to the RBI at the end of the swap period.

The RBI has said that it will conduct a spot sale to sell $5 billion worth of US dollars in exchange for rupees to banks on March 10, 2022. It will make a forward purchase from the banks in two years on March 11, 2024.

In the first leg of the transaction, the banks will buy US dollars from the Reserve Bank at reference rate of the auction date. The settlement of the first leg of the swap will take place on spot basis on March 10 and the Reserve Bank will debit the rupee funds from the current account of the successful bidder and the bidder will receive dollars.

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Why is the RBI conducting the auction?

When a sell-buy swap auction happens, the RBI sucks out a similar quantum amount of Indian rupees from the system, reducing the liquidity. Currently, the banking system has a surplus cash of Rs 6.96 lakh crore versus about Rs 8 lakh crore a few weeks ago.

“With a view to elongating the maturity profile of its forward book and smoothen the receivables relating to forward assets, it has been decided to undertake a sell/buy swap auction,” the RBI said on Monday, reported The Economic Times.

Market experts say that the move will suck out liquidity ahead of the LIC IPO and resolve other issues that are lined up in March.

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“The FX swap tool would also prepare RBI to manage the gush of dollar flows ahead of the LIC IPO and other smaller IPOs lined ahead in the coming month(s) amounting to $15-18bn+,” said Madhavi Arora, lead economist, Emkay Global to the Business Standard. “The sell-buy swap would thus be used tactically by the RBI as one of the tools to smoothen banking system liquidity,” she added.

According to forex market experts, a combination of factors, including a possible faster pace of tightening by the US Fed, higher crude oil prices and the standoff between Russia-Ukraine causing geopolitical tensions could pressure emerging market economy currencies. Thus, a USD-INR sell/buy swap will help as it will enhance the supply of dollars in the economy.

“This is a case of levelling out rupee liquidity from the system while it also helps manage volatility in the forex market," Madan Sabnavis, Chief Economist at Bank of Baroda, told ET.

Also read: View: More depreciation on cards for rupee in 2022

India’s robust forex reserves (at $630 billion as on February 11) provide the central bank with the means to undertake the swap. According to the RBI, the minimum bid size will be $10 million and in multiples of $1 million thereafter reported the Hindu Business Line.

A wider set of market participants will have access to the auction. It will be a multiple-price-based auction that will accept successful bids at their respective quoted premia.

(Edited by : Shoma Bhattacharjee)

First Published:Feb 22, 2022 6:40 PM IST