Reserve Bank of India's $5 billion swap shakes up rupee and bond markets

Forward premiums dip, rupee slides, and bond yields fluctuate

The forward premium on the USD/INR one-month contract declined by 35 basis points (bps), while the one-year forward premium fell by 10 bps to 2.19 per cent following the Reserve Bank of India’s (RBI’s) announcement of a USD/INR buy/sell swap auction worth $5 billion for a six-month tenor, scheduled for January 31. Market participants observed that traders adjusted their positions in response to the expected liquidity impact of the auction.

 

In the spot market, the rupee depreciated amid a dampened global risk appetite. The currency weakened by 0.2 per cent to 86.53 against the dollar due to renewed concerns about trade tariffs under the administration of US President Donald Trump. This weighed heavily on investor sentiment, keeping most Asian currencies under pressure. At the same time, global markets experienced broader risk-off sentiment, further impacting emerging market assets, including the rupee.

 

 

The rupee had settled at 86.34 per dollar on Monday.

 

“The swap window that was announced caused forward premiums to decline,” said Anshul Chandak, head of treasury at RBL Bank. “The bond yields did not react much because they had already moved on Monday. It was kind of factored in that the RBI would do something about liquidity,” he added.

 

The 10-year benchmark bond yield softened by 6 bps during the day but gave up all gains by the end of trading as state-owned banks sold bonds at a profit, according to dealers. The benchmark yield ended 1 bp higher than the previous close at 6.89 per cent.

 

The softening of yields in early trade was attributed to the RBI’s liquidity infusion measures, which helped assuage market concerns about tight liquidity conditions. 

 

“Once the news was out, everybody was ready to book profits. Traders and banks wanted to take some profits off the table. The levels (yield on the benchmark bond) were 6.62 per cent, 6.64 per cent, and 6.65 per cent, where people had already factored in a 50-bp cut. That’s why major banks wanted to make a profit from it,” said V R C. Reddy, head of treasury at Karur Vysya Bank. “The yield may not go much beyond 6.7 per cent because open market operations (OMO) purchases are lined up, and there’s interest in taking the yield at a lower level. Mostly, the range will be between 6.65 per cent and 6.7 per cent until the Union Budget,” he added.

 

The RBI will conduct OMO auctions of Government of India securities totalling Rs 60,000 crore in three tranches of Rs 20,000 crore each on January 30, February 13, and February 20. A 56-day variable rate repo auction for Rs 50,000 crore will be held on February 7.

 

The net liquidity deficit stood at Rs 3.1 trillion on Monday, according to the latest data from the RBI. The net liquidity deficit has remained above Rs 3 trillion for the past five days, except on Friday.