Forex swap to have a cooling effect on rupee volatility – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/money-and-banking/forex-swap-to-have-a-cooling-effect-on-rupee-volatility/article65205162.ece

The RBI received bids aggregating $13.565 billion against the notified amount of $5 billion

The RBI received bids aggregating $13.565 billion against the notified amount of $5 billion | Photo Credit: MicroStockHub

Reserve Bank of India accepts bids worth $5.135 billion at the two-year USD/INR sell/buy swap auction

In a move that could cool volatility in the dollar (USD) – rupee (INR) exchange rate going forward, the Reserve Bank of India (RBI) on Tuesday accepted bids worth $5.135 billion at the two-year USD/INR sell/buy swap auction.

Dollar inflows from the auction and inflows of a like amount from a maturing swap towards the month-end is expected to cool volatility in the USD-INR exchange rate going forward, according to currency experts.

War-induced depreciation

These inflows come at a time when the rupee has weakened sharply by about ₹2 per dollar in the last 13 days amid escalating war between Russia and Ukraine, surging crude oil prices, foreign investors pulling out investments from equities, and fears of widening current account deficit. The rupee had closed at a life-time low of 76.96 to the dollar on Monday. On Tuesday, it appreciated by about 5 paise to close at 76.91 following the auction.

RK Gurumurthy, Treasurer, Dhanlaxmi Bank, said: “The bid to cover ratio was very impressive. This means that probably there is some dollar shortage in the system arising out of mismatches and not a structural shortage. This sell/buy swap therefore, will go some way in addressing that. Quite likely that the panic buying we saw last few sessions will abate and volatility will also sober down.”

He observed that while the correlation to crude prices will remain high for sometime to come, rupee weakness hereon, should be tempered and moderate and the probability is for a gradual mean reversal. “It won’t be surprising if we see a move back to the 76.25-76.50 per dollar window in the coming days,” Gurumurthy said.

“The current swap may have helped withdraw about ₹37,500 crore of durable liquidity from the banking system but the comfort of close to ₹7.3-lakh crore of systemic liquidity should offset short term liquidity disruptions from GST outflows or the increased T-Bill auction amounts,” Gurumurthy said.

More dollar liquidity

On March 28, the three-year USD/INR buy/sell swap auction that RBI had conducted on March 26, 2019, will mature, thereby infusing about $5 billion worth of dollar liquidity into the banking system. IFA Global noted that the RBI’s planned forex swap auction has sailed through smoothly.

“The USDINR pair remained firm because some State-owned banks purchased dollars on behalf of oil marketing companies as Brent crude prices remained elevated around the $128-a-barrel mark …the dollar index remained elevated due to safe haven demand, as investors weighed the consequences of rising oil prices on global economic growth amid the ongoing Russia-Ukraine conflict, which weighed on sentiment for the domestic currency,” IFA Global said.

Published on March 08, 2022

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