Banks, importers seen lapping up India central bank's $5 billion FX swap

The Reserve Bank of India's $5 billion dollar/rupee buy-sell swap auction on Friday is likely to see strong demand from lenders and corporate treasuries, six bankers said.

The central bank will conduct a 6-month dollar/rupee buy-sell swap, one of its many planned measures aimed at injecting liquidity worth about Rs 1.5 trillion ($17.33 billion) into the banking system.

The RBI's interventions to cushion the rupee's plummet to all-time lows have pushed up dollar liquidity in the banking system.

A part of the central bank's dollar sales has been taken up by banks that were involved in arbitrage activity, leaving them with excess dollars, a person familiar with RBI's thinking said.

The FX swap will involve the RBI buying spot dollars, which would both inject rupee liquidity and drain some dollars. The transaction will be reversed in six months.

Corporate treasuries, meanwhile, may participate to secure forward dollars, bankers said.

"We expect strong demand with oversubscription in the RBI FX swap auction considering the surplus USD in the system currently," said Sameer Karyatt, executive director for treasury and markets at DBS Bank India.

Banks will submit bids in terms of the premium they are willing to pay for the tenor of the swap.

The six-month dollar-rupee forward premium was last at 94.50 paisa, having declined about 10 paisa since the liquidity measures were announced on Monday.

While there was unanimity among bankers that the swap would see heavy interest, opinions varied on the premium cut-off.

Most reckoned that it would be near current market levels, which one banker said could sway corporate treasuries to hedge their exposure directly with banks, rather than enter the auction.

However, one banker said the cut-off would be lower than the market rate and another said it would be slightly higher.

"Given the fact that the auction is a multiple-price auction, the participants are likely to put in multiple bids at different prices," Karyatt said.

But the RBI's "regular sterilisation and interventions are likely to cap any significant deviation in auction cut-off levels from the prevailing market levels."