RBI swap auction sees strong demand; bids twice the notified amount

The Reserve Bank of India’s three-year dollar/rupee buy-sell swap saw strong demand on Tuesday, with bids exceeding twice the notified $5 billion amount.

 

At the auction, the central bank received 222 bids worth $10.35 billion and accepted 118 bids, with the cut-off premium set at Rs 7.65. Bankers said demand was strong due to ample dollar liquidity in the system. 

“The response was better than market expectations. The bid-offer was 2:1, so almost double the amount was bid. The concern right now is the rupee breaching the 91 level. We do not want it to fall further. But I think till the last week of December it will continue to depreciate,” said the treasury head of a private bank. 

The first leg of the swap will be settled on Thursday, when the RBI will inject rupee liquidity into the banking system. The transaction will be reversed after three years. 

The swap auction is part of a broader set of liquidity measures announced by the central bank at the recent monetary policy review meeting outcome, which also includes open market operations (OMOs) worth Rs 1 trillion, to be conducted in two tranches. The first tranche of Rs 50,000 crore was conducted on December 11, and the second OMO auction is scheduled for December 18.

 

While net liquidity has remained in surplus for the major part of the current financial year, experts expect liquidity to tighten in the near term on the back of foreign exchange interventions and increased currency circulation.

 

Liquidity is primarily needed to maintain banking reserves. It fluctuates due to currency in circulation, when currency is issued and deposits decrease, or through foreign exchange operations, such as selling dollars, which draw deposits out of the banking system. Changes in reserve requirements due to higher deposits also affect liquidity.