Rbi Changes Tack, Makes $250m Sell-Buy Swaps

In a reversal of its previous stance, the Reserve Bank of India yesterday conducted sell-buy swaps worth $250 million to mop up liquidity from the banking system and check the rupees depreciation against the dollar. This led to forward premia shooting up and call rates hardening marginally.

For the past two weeks, the Reserve Bank has been doing buy-sell swaps to release rupees into the system and arrest the rupees appreciation. However, yesterday it sold dollars in the spot market and bought them back in the forward market, thus sucking rupees out of the banking system.

After the rupee opened weak at 38.93 yesterday, down from the previous close of 38.90, the Reserve Bank immediately reversed its previous intervention technique and began conducting sell-buy swaps. This pushed up the rupee, which eventually closed at 38.73.

The RBI intervention pushed up forward premia as it was buying the greenback one month forward. The one-month forward rose to 21 per cent yesterday from 14.31 per cent on Monday. The six month also hardened to 17.5 per cent from 11.79 per cent.

The change in the RBIs intervention strategy also seems to have been prompted by the forthcoming inflows into the banking system and the fact that the call rate is ruling below the bank rate. Rs 3,461 crore is expected to enter the system during the fortnight ending February 14. Of this, Rs 1,600 crore was pumped in due to the buy-sell swaps that the Reserve Bank conducted on January 27 and January 28. All these buy-sell swaps increased the RBIs reserves, which are now being drawn down to conduct sell-buy swaps.

The RBI intervention yesterday pushed call rates up to 9.75 per cent from 9.25 per cent on Monday, which is still lower than the bank rate of 11 per cent. However, dealers expect call rates to touch 12 per cent today as the sell-buy swaps have sucked out nearly Rs 1,000 crore from the system. Dealers said the RBIs move was a clear indication that it does not want the rupee to move out of a band.