RBI's $5 billion swap maturity causes flutter, but no major turbulence

The maturing of the Reserve Bank of India's $5 billion swap on Monday led to a surge in demand for cash dollars and a drop in the overnight swap rate, but did not cause major disruptions in the premium and spot forex markets.

The RBI's dollar/rupee swap, executed in April 2022, was undertaken to give banks dollar liquidity, which it will now withdraw, meaning banks who had entered into the swap will have to return the dollars.

One of the ways a bank can do that is by accessing the overnight swap market to borrow dollars vis-a-vis the rupee. A fall in the swap rate means there is a high demand for dollars.

That rate, on Monday, dropped to 0.14 paisa, which equates to 0.07 paisa per day since the forex market is closed on Tuesday for a local holiday. Either way, the rate is well below the 0.17 paisa on Friday.

Based on the swap cost, the imputed rupee interest rate of 5.60 per cent is well below the comparable 6.60 per cent overnight rupee call rate.

In other words, the banks are willing to lend rupees at a cheaper rate to raise dollars, a sign that they are short of the greenback.

Currently, it seems this shortage will last for the short term, said Ritesh Bhusari, joint general manager for treasury at South Indian Bank.

"If the global dollar shortage worsens and geopolitical risks accentuate, there may be (RBI) intervention through sell-buy swaps to manage dollar liquidity in the market," he said.

Tracking the fall in the cash swap rate, rupee forward premiums, both near and far, extended their declines. The 2-month and 1-year premiums were at their lowest since mid-August and early September, respectively.

The rupee itself was in a narrow range and last quoted at 83.1575 per dollar.

If the swap rate had fallen into a discount, there would have been a larger drop in premiums and that "would have meant an additional source of pressure" for the rupee, a senior FX sales head at a private bank said.

"The swap maturity ... has not brought about any notable dislocations."