The Reserve Bank of India (RBI) may be killing two birds – attracting Dollars and infusing Rupee liquidity — with a single stone via the US Dollar/Rupee Buy/Sell auction of three-years tenor for $10 billion it will conduct on on February 28.
The longer tenor swap could encourage Banks to mobilise longer tenor Foreign Currency Non-Resident (FCNR) deposits so that they deploy the same with RBI and draw Rupee liquidity aggregating about ₹87,000 crore.
This auction announcement comes in the backdrop of the central bank conducting a similar auction of six-months tenor on January 31 for $5 billion.
The liquidity deficit in the banking system can be gauged from the fact that as on February 20 is estimated at about ₹1.90 lakh crore. The deficit has come about due to RBI’s intervention in the forex market to smoothening excessive and disruptive volatility and tax outflows.
V Rama Chandra Reddy, Head – Treasury, Karur Vysya Bank, noted that when RBI sells dollars, rupee liquidity is sucked out. To counter the effect of this operation, USD/INR Buy/Sell swap is being undertaken.
“The tenor of the swap is three-years. So, its purpose may not just be infusing rupee liquidity. There could be another angle to it. Our forex reserves have come down by about $70 billion in the last 3-4 months. Now, the need of the hour is to attract dollar inflows.
“So, when a 3-year swap is given, banks may mobilise longer-tenor FCNR ( deposits and deploy it with RBI. This way banks will not have an interest rate risk,” he said.
The RBI is infusing liquidity into the banking system via daily variable rate repo (VRR) auctions, VRR auction of longer-tenor – 14 days, 45 days and 56 days, open market purchase of Government Securities and USD/ rupee Buy/Sell swap auction.
The last time RBI conducted three-year USD/ rupee Buy/Sell swaps of $5 billion each was to meet the liquidity requirements when the markets undergoing liquidity crisis after the IL&FS crisis and also to meet the demand for rupee liquidity ahead of the 2019 general elections.
