RBI seems to have prepared the ground for no rollover of $5 b sell/buy swap: market experts

The Reserve Bank of India seems to have prepared the ground well in advance for not rolling over the $5 billion sell/ buy swap, which matures on October 23rd, going by the indications it gave earlier this month that it may conduct Open Market Operation (OMO) sales of Government Securities and more recently its interventions in the foreign exchange (forex) market.

This is underscored by the fact that over the last 10 days or so the central bank has been consistently selling Dollars in the spot market to enhance Dollar supply (and protect the Rupee from depreciation) even as it is in readiness to suck out liquidity amounting to about ₹40,000 crore-42,000 crore, which will enter banking system if there is no rollover of the swap, by keeping the OMO sales option open.

The RBI undertook a sell/ buy swap auction of $5 billion on April 26, 2022, whereby it sold Dollars to Banks in the first leg (to boost dollar supply even as Banks then had surplus Rupee liquidity) and simultaneously agreed to buy Dollars from them in the second leg (at the end of the swap period: October 23, 2023).

No swap rollover scenario

In a no-swap rollover scenario, the action of RBI buying Dollars will release Rupee liquidity into the banking system. To absorb the same, it could employ OMO sales of Government Securities.

“There are three possibilities when it comes to the maturing swap —no rollover, complete rollover and partial rollover (maybe rollover of partial amount for a shorter period) — to overcome Dollar deficit.

“But the possibility of no rollover of swap looks stronger given RBI’s interventions in the forex market and possibility of it conducting OMO sales to manage the resulting surplus liquidity,” said V Rama Chandra Reddy, Head — Treasury, Karur Vysya Bank.

Bank treasury officials underscored that if the central bank wanted to rollover the swap, it would have made announcement to this effect a few days in advance. They pointed out that to conduct the aforementioned $5 billion sell/buy auction on April 26, 2022, RBI had made an announcement on March 29, 2022.

Different view

Referring to the Rupee again coming under pressure, having fallen to a fresh record-low in the last few sessions, Aditi Gupta, Economist, Bank of Baroda, opined that there is an imminent possibility of more pressure on the currency from the Fed’s higher for longer rates narrative and escalation in hostilities leading to higher oil prices.

“In such a scenario, it looks likely that the RBI would roll-over the swap to a later date. This view also gets support from the fact that the RBI has shown an intent to keep liquidity conditions tight.

“The delivery of the swap could lead to potential liquidity influx of ₹40,000-42,000 crore in the system, which will be detrimental to the RBI’s effort to maintain liquidity at a level which is not inflationary,” she said.

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