'RBI's $10 bn foreign exchange swap to sail through on corporate demand'

The arbitrage opportunities between onshore and offshore markets alongside an expected pick up in corporate participation are likelt to ‍help the Reserve Bank of India's $10 ​billion foreign-exchange swap sail through smoothly, bankers said.

Bids for the operation will be submitted by banks in the first half of Tuesday, with the premium quoted in paisa terms, and the results will be declared later in the day.

The swap involves the RBI buying dollars and injecting rupees in the first leg, which will be settled on Friday, before reversing ​the transaction three years down the line.

The operation will inject $10 billion of rupee liquidity, part of measures unveiled by the central bank last month. The announcement of the swap helped rein in a surge in dollar-rupee forward premiums in late December.

 

"The swap should sail through, with bids likely north of $15 billion. An arbitrage of about 25-30 basis points (between the 3-year offshore and onshore rates) will draw in offshore players," a senior treasury official at a foreign bank, said.

An FX salesperson at another foreign bank said he has been pitching the opportunity to clients, emphasizing the relative value on offer from the spread between onshore and offshore rates.

Both spoke on condition of anonymity since they are not authorised to speak ??to the media.

The Reserve Bank of India conducted a smaller $5 billion swap of the same tenor last month, ‌that had limited corporate participation, bankers said.

"This time, ​taking into account the longer window between the announcement and the auction, we expect corporate participation to be higher on a relative basis," a currency trader at ??a large private sector bank said.

He noted that while none of the large corporates he deals ??with were ‍bidding at the auction, participation from mid-sized firms was likely.

The main point of debate among bankers is where the cut-off will be. Some traders, predominantly from foreign banks, ‍expect ‌a cut-off well ​below market levels, similar to the previous auction when the ‍cut-off was around 25-30 paisa lower. Other traders say they expect a result closer to ‍prevailing ‍levels. The 3-year ‌FX forward swap points were last at 7.35 rupees.