Coronavirus impact: RBI offers $2-bn swaps to deal with currency swings

The Reserve Bank of India (RBI) on Thursday moved to address the dollar shortage in the market by offering a $2-billion swap for six months — a step that should ease pressure on the rupee, which is marching towards its record low.

The RBI will do a sell-buy swap, which means the central bank will sell dollars in the market now and buy them back six months down the line (or decide to roll over). 

In March last year, the RBI had done buy-sell swaps for three years. Then, it had bought dollars in the spot market to infuse immediate rupee liquidity into the system.

In a statement on its website, the RBI said it was doing the swaps in view of the intense selling pressure witnessed worldwide on “extreme risk aversion due to the spread of COVID-19 infections". This is "compounded by the slump in international crude prices and a decline in bond yields in advanced economies”. All asset classes are witnessing a spike in volatility, with mismatches in US dollar liquidity accentuating across the world, it noted.

Thursday’s swap is the first of many such possible ones to come, as the Indian central bank gears up to utilise its formidable foreign exchange reserves to soothe the nerves of the market. For this purpose, the level of forex reserves, at $487.24 billion as of March 6, “remains comfortable to meet any exigency”, the RBI said.

The rupee touched 74.50 a dollar in intra-day trade, crossing its record low of 74.46 a dollar in October 2018, as foreign portfolio investors (FPIs) continued to liquidate their local holdings in favour of the US treasury. In March so far, FPIs have liquidated $2.67 billion in equities and $1.2 billion in bonds. The rupee closed at 74.22 a dollar on Thursday.

The RBI’s move comes on the heels of the US Fed pumping extra liquidity in the overnight lending markets, while Russia supplied dollars and Indonesia stepped up its bond purchases to support the local currencies. However, a global coordinated action, promised by the G-20 central banks, has not yet happened.

“Global coordinated action is delayed. There is not much of help from any quarters either, so the RBI did not wait and decided to take charge of the situation so that the markets are not unduly worried,” said a person familiar with RBI thinking.

The rupee’s movement from 72.73 a dollar on March 2 to its latest level of 74.24 a dollar was probably too fast for the RBI’s liking, especially because the trading volume has thinned.

“The RBI has no problem if the rupee depreciates, but it should be orderly. The recent movement has not been orderly at all. The persistent pressure on the rupee is because of the global dollar shortage, which is feeding into sentiment,” said the person.

Currency dealers say the RBI’s actions caused some volatility in the forwards premium. The dollar premium was high in the first half, indicating there was demand for future dollars. But the premium collapsed in the afternoon. Later, the RBI announced a sell-buy swap, which pushed up the forwards premium again as spot dollar liquidity outlook improved, while demand for future dollars increased.  

“The RBI has much better knowledge than the markets about dollar shortages. Besides, FPIs had contracted huge amount of dollars for the SBI Card IPO, which will get reversed in a day or two. The RBI’s move can help address that on an immediate basis,” said Paresh Nayar, head of forex and fixed income at First Rand Bank.

The central bank said it was closely and continuously monitoring the rapidly evolving global situation and spillovers. The RBI “stands ready to take all necessary measures to ensure that the effects of the COVID-19 pandemic on the Indian economy are mitigated, and financial markets and institutions in India continue to function normally,” the statement said.