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RBI sets high cut-off at FX swap auction, forward rates jump

RBI sets high cut-off at FX swap auction, forward rates jump

Reserve Bank of India on April 23 set a cut-off at its second dollar/rupee swap auction at a much higher than expected premium, in a sign that the system is flush with dollar liquidity that banks are struggling to find buyers for.

The Central Bank set a premium of 8.38 rupees at the three-year buy-sell swap auction and accepted the entire planned $5 billion up on offer.

The RBI has been conducting the auctions in a bid to absorb the dollars in the system and prevent a sharp rise in the currency while also providing rupee liquidity to the banks.

Dollar-Rupees Swap Auction

The RBI has different tools through which it injects liquidity into financial markets.

Adjusting repo rates and purchasing bonds by conducting open market operations (OMO) are a couple of tools which the RBI uses regularly either to increase or decrease the currency supply in the market.

Through this auction, the RBI will buy US dollars from banks totalling to $5 billion.

In turn the RBI will pay rupees to the participating banks at the current spot rate.

At an average spot rate of 70 per dollar, the RBI will able to infuse about ₹35,000 crore into the system through this auction process.

Simultaneously, the banks will agree to buy-back the same amount of dollars from the RBI after three years — the tenor of this auction.

The participating banks have to bid in the auction by quoting a forward premium in terms of paisa that they will pay to buy back the dollars.

For example, if the spot exchange rate is 70 to a dollar, say Bank A quotes a premium of 150 paisa and bids for $25 million. So, the bank will get ₹175 crore ($25 million multiplied by the exchange rate of 70). After three years, the bank has to pay back approximately ₹179 crore ($25 million multiplied by the exchange rate of 71.5) to the RBI to buy back $25 million.

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