The Reserve Bank of India is
likely conducting near-maturity dollar/rupee sell-buy swaps, as
part of its recent efforts to absorb surplus rupee liquidity
stemming from overseas deposits raised by lenders, bankers said.
The central bank is conducting the swaps with a maturity in
September, four bankers and two FX brokers said, while two of
four bankers said it was likely doing so for October maturity as
well.
Forward premiums for September and October rose in response,
lifting premiums across tenors, according to the traders.
The bankers, traders and brokers requested anonymity as they
are not authorised to speak to the media. The RBI did not
immediately respond to an email seeking comment.
In a swap, the RBI sells dollars at the spot rate in
exchange for rupees, effectively sucking liquidity out of the
banking system. The transaction is reversed at maturity, which
in this instance would be either September or October.
Two other bankers estimated that the central bank had
conducted swaps worth about $700 million across the two
maturities. Indian lenders had proposed using FX sell-buy swaps
for liquidity management at a recent meeting with the RBI.
The RBI’s move on Wednesday comes after its 30-day
variable-rate reverse repo (VRRR) operation drew a weak response
earlier this week.
LIQUIDITY GLUT
The banking system is saturated with rupee liquidity
following a surge in dollar deposits raised by lenders from
non-resident Indians and swapped with the RBI for rupees at zero
cost.
Gaura Sen Gupta, chief economist at IDFC FIRST Bank,
estimated that core liquidity surplus has peaked at 14 trillion
rupees to ₹15 trillion ($147.26 billion-$157.78 billion).
The RBI will aim to drain about ₹7 trillion using VRRR
operations and more durable instruments, she said, adding that
sell-buy swaps are likely to be among the RBI’s preferred
options.
Banks have raised about $128 billion through non-resident
deposits, far exceeding initial expectations.
“The RBI had to look at ways to manage the liquidity
overhang and it looks like, for now, it has decided to use
swaps, which buys it time for a few weeks,” a senior treasury
official at a mid-sized private sector bank said.
Another benefit of sell-buy swaps is that they can help the
RBI trim the size of its FX forward book, he added.
The central bank’s net forward dollar liabilities stood at
about $137 billion at the end of July with $47.6 billion in the
up to one year bucket.