The Reserve Bank of India (RBI) has decided to undertake a US Dollar/ Indian Rupee sell/ buy swap auction of $5 billion on March 8, amid the upcoming reversal of a buy/sell auction it had undertaken for a similar amount three years back and expected volatility in the foreign exchange market once US Fed hikes rates.
Under a sell/buy swap, a bank buys US Dollars (USDs) from RBI and simultaneously agrees to sell the same amount of USDs at the end of the swap period. Similarly, under a buy/sell swap, a bank sells USDs to RBI and simultaneously agrees to buy the same amount of USDs at the end of the swap period.
The central bank said the swap auction is being conducted with a view to elongating the maturity profile of its forward book and smoothen the receivables relating to forward assets.
“This will enable access to a wider set of market participants. The auction will be multiple-price-based — successful bids will be accepted at their respective quoted premiums,” RBI said in a statement.
Pressure on currencies?
Forex market experts say a combination of factors, including possible faster pace of tightening by the US Fed, geopolitical tensions due to Russia-Ukraine standoff and higher crude oil prices, could pressure emerging market economy currencies.
The minimum bid size will be $10 million and in multiples of $1 million thereafter. The eligible participants can also submit multiple bids. However, the aggregate amount of bids submitted by a single eligible entity should not exceed the notified amount of auction.
The far leg date relating to reversal of the aforementioned swap, whereby rupee funds will have to be returned by banks to RBI along with the swap premium to get the dollars back is March 28.
Meanwhile, the rupee ended 11 paise stronger at 74.55 to the dollar against the previous close of 74.66 as foreign banks pressed dollar sales in anticipation of inflows from foreign investors towards investment in LIC’s forthcoming IPO.
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