RBI likely to have rolled over a part of $5-billion forex swap to boost liquidity

The Reserve Bank of India may have rolled over a portion of its $5-billion foreign exchange swap that was due for maturity on Monday by conducting an ultra-short term swap whose maturity would augment system liquidity amid tax outflows and currency leakage in the festive season.

On April 28, 2022, the RBI concluded a sell-buy foreign exchange swap under which banks bought US Dollars from the central bank and simultaneously agreed to sell the same amount of dollars at the end of the swap period. The maturity of the swap, which was due on October 23, would have released around ₹40,000 crore into the banking system as purchases of dollars by the RBI inject rupee liquidity into the banking system.

"The RBI most probably would have rolled over a portion of the transaction because we have not seen too much of an upside in the dollar-rupee. Given the quantum of the FX swap, if they (the RBI) would have bought dollars, the exchange rate should have gone to 83.25-83.30/$1," said Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors.

"Not only has the dollar-rupee exchange rate not gone up that much but it's still being sold (dollars being sold). So, I feel the RBI would have rolled over the transaction. The dollar shortage that was expected has not played out," he said.

At present, the RBI is faced with a tricky balance when it comes to balancing the impact of its actions in the currency market and their impact on liquidity in the banking system, especially as the central bank has recently flagged inflationary risks emanating from excess cash with banks.

In April 2022, the RBI had said that it had conducted the $5-billion sell-buy swap to elongate the maturity profile of its forward book and smoothen receivables related to forward assets. By carrying out the swap, the RBI had drained the banking system of rupee liquidity, which at the time was at a massive surplus of around ₹5 trillion due to central bank cash infusions during the Covid crisis.

Two foreign bank traders who spoke on condition of anonymity said that the RBI had most likely conducted another swap for around $1.5-2.5 billion which would mature by the end of this week.

"It seems that the RBI has rolled over around half of the $5 billion swap and would have taken delivery of the rest. That is also reflected in the overnight cash-tomorrow rate which was trading below 6% as some banks were preparing for the RBI to take delivery of dollars," one of the foreign bank traders said.

With the RBI having likely taken delivery of some dollars and lined up more such transactions in coming days, liquidity would be released in the banking system in a staggered manner, compensating for GST outflows and a seasonal increase in currency leakage amid festivals.