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In a move that could cool volatility in the rupee-dollar exchange rate, the Reserve Bank of India on Tuesday accepted bids worth $5.135 billion at the two-year USD/INR sell/buy swap auction.
The RBI received bids aggregating $13.565 billion against the notified amount of $5 billion. The central bank accepted 86 bids (out of 246 received) aggregating $5.135 billion, which entails the RBI selling US dollars (thereby sucking out an equivalent amount of rupee). On maturity of the swap, the RBI will buy back the dollars from market participants.
Dollar inflows from the auction and inflows of a like amount from a maturing swap towards the month-end is expected to cool the volatility in the USD-INR exchange rate, according to currency market watchers.
War-induced depreciation
These inflows come at a time when the rupee has weakened sharply by about ₹2/dollar in the last 13 days amid escalating war between Russia and Ukraine, surging crude oil prices, foreign investors pulling out from Indian equities, and the fear of a widening current account deficit. The rupee had closed at a life-time low of 76.96 to the dollar on Monday. On Tuesday, post the swap auction, it appreciated by about 5 paise to close at 76.91.
RK Gurumurthy, Treasurer, Dhanlaxmi Bank, said: “The bid to cover ratio was very impressive. This means that probably there is some dollar shortage in the system arising out of mismatches and not a structural shortage. This sell/buy swap therefore, will go some way in addressing that. Quite likely that the panic buying we saw last in the few sessions will abate and volatility will also sober down.”
He observed that while the correlation to crude prices will remain high for some time to come, rupee weakness hereon should be tempered and moderate and the probability is for a gradual mean reversal. “It won’t be surprising if we see a move back to the 76.25-76.50 per dollar window in the coming days,” Gurumurthy said.
“The current swap may have helped withdraw about ₹37,500 crore of durable liquidity from the banking system, but the comfort of close to ₹7.3-lakh crore of systemic liquidity should offset short-term liquidity disruptions from GST outflows or the increased T-Bill auction amounts,” Gurumurthy said.
More dollar liquidity
On March 28 mature the three-year USD-INR buy/sell swap auction the RBI conducted on March 26, 2019, thereby infusing about $5 billion into the banking system.
“The USDINR pair remained firm because some state-owned banks purchased dollars on behalf of oil marketing companies as Brent crude prices remained elevated at around the $128/barrel ...the dollar index remained elevated due to safe haven demand, as investors weighed the consequences of rising oil prices on global economic growth amid the ongoing Russia-Ukraine conflict, which weighed on sentiment for the domestic currency,” said IFA Global.
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