Big change in RBI tack, sells $s to stave off shortage, curb Re

Reserve Bank of India's (RBI) intervention strategy has taken a new turn.

According to dealers, nationalised banks on behalf of the central bank have been aggressively intervening in the forward market by supplying cash dollars.

The intervention ranged between $200-250 million yesterday whereby the RBI infused dollars in the cash market with an underlying agreement to buy them back at various intervals, dealers said.

Dealers added that the intervention is aimed at warding off cash dollar shortage during the approaching month-end.

This is being done with the help of structured swaps such as cash spot, cash-six-month or cash-one year swaps.

As a result, the six-month and one-year forwards premiums have shot up since last week. Although the new mode of intervention started last week, the effect was apparent yesterday when the six-month annualised forwards rose to 0.87 per cent as against last week's close of 0.57 per cent.

Similarly, one-year annualised forward premiums ended at 0.78 per cent against 0.49 per cent last week.

The change was apparent as the tenure of the swaps was elongated.

Dealers said while the RBI was engaged in cash-spot swaps last week, it was mostly cash-six month or cash-one year deals yesterday.

Cash-spot swap relates to selling dollars in the cash market and buying it back in the spot market, whereas under cash-six month or cash-one year swaps dollars are supplied in the cash market and bought back in the six-month and one-year segments, respectively.

The strategy seems to have paid off as a dollar shortage in the cash market has been warded off and also, the longer tenure of swaps have lifted the premium on long forward dollars.

Some time back, the RBI had stopped intervening in the forward market and instead was active in spot in a bid to curb the rupee.

The strategy, said dealers, led to a firming up of the forward dollar. However, it could not be sustained as month-end rollover of swap contracts eventually brought about the cash shortage problem and forward dollars fell into discount territory.

Forward swaps were being rolled over since October when banks had entered into sell-buy swap to deliver cash dollars to the RBI. However, cash dollar shortage has led to the rolling over of such contracts till yesterday.