The Reserve Bank of India (RBI) announced a USD/INR buy/sell swap auction of $5 billion set for May 26, aimed at addressing the evolving liquidity conditions. This strategic move comes amid a 6% depreciation of the rupee since the onset of the Iran conflict on February 28, with the currency hitting a new low of 96.83 per dollar on Wednesday.
The auction will be a simple buy/sell foreign exchange swap, where banks sell dollars to the RBI and agree to repurchase them at the end of the swap period. This measure is expected to alleviate the forward premium from recent highs and enhance rupee liquidity in the banking system. The auction cut-off will be determined by the premium amount in paisa terms, with bids required to specify the premium they are willing to pay.
The RBI has been utilizing its foreign exchange reserves to stabilize the rupee, which stood at $696.988 billion as of May 8, down from the peak of $728.49 billion on February 27. This marks the first dollar-sell swap by the central bank amidst the geopolitical tensions that began on February 28, following two previous swaps of $10 billion each earlier in the year.
“The dollar-rupee swap is expected to cool down the forward premium from the recent highs, besides improved rupee-liquidity in the banking system.”
Economist, Foreign Bank
An economist with a foreign bank noted that the swap is expected to cool down the forward premium and boost the country's forex reserves. The rupee's depreciation and volatility have prompted the RBI to take such measures to ensure stability in the currency market.
The swap auction is a significant step by the RBI to manage liquidity and stabilize the rupee amid ongoing geopolitical challenges. Market participants will closely monitor the auction's outcome and its impact on the forward premium and rupee liquidity.
Background
The RBI has been actively managing its foreign exchange reserves to counter the rupee's volatility, which has been exacerbated by geopolitical tensions since February 28. The reserves have seen a decline from their peak earlier this year, prompting the central bank to implement strategic measures such as the upcoming swap auction.
Looking ahead, the market will watch for further RBI interventions and their effects on the rupee and forex reserves. The outcome of the May 26 auction will be crucial in determining the short-term trajectory of the rupee and the central bank's future policy actions.
