The auction will happen on March 26 and the buy/sell swap will run up to March 28, 2022, or for a three-year duration. The system liquidity is dry to the tune of little more than Rs 1 trillion, but it will be acute in the coming days as advanced tax outflow (estimated at Rs 1.5 trillion) and the goods and services tax (GST), which is estimated at Rs 1 trillion, will suck out liquidity from the system.
This liquidity will return only in the next financial year as the government starts spending. Till then, rates may shoot up if adequate liquidity support is not given to banks, experts say.
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“Banks may not have adequate collateral to pledge to borrow from the RBI because of high SLR (statutory liquidity ratio) and LCR (liquidity coverage ratio) requirement, and so, this liquidity support through dollar purchase would be needed to partially meet the requirement,” said Soumyajit Niyogi, associate director, India Ratings and Research. Another senior bond trader said this kind of liquidity management was often done by the RBI and banks. However, it was not in a large scale, so it was never notified.
The central bank said the swap facility is part of its “liquidity management toolkit” and would be to meet the durable liquidity needs of the system. “The swap is in the nature of a simple buy/sell foreign exchange swap from the Reserve Bank’s side. A bank shall sell US dollars to the RBI and simultaneously agree to buy the same amount of US dollars at the end of the swap period,” the central bank said.
“The US dollar amount mobilised through this auction would also reflect in the RBI’s foreign exchange reserves for the tenor of the swap while also reflecting in RBI’s forward liabilities,” the RBI said. This means the foreign exchange reserve will see a bump of $5 billion, while the RBI’s forward sell position will also go up by $5 billion. The RBI will buy dollar from banks, only to sell it three years down the line to banks. At present, the RBI has a net sale position of $3 billion in the forwards segment. “The market participants would be required to place their bids in terms of the premium that they are willing to pay to the Reserve Bank for the tenor of the swap, expressed in paisa terms up to two decimal places. The auction cut-off would be based on the premium,” the RBI said in its statement.