RBI to enter into sell-buy swaps worth $5 billion

Bloomberg

India’s central bank will enter into sell-buy swaps worth $5 billion with banks to elongate the maturity profile of its
forward dollar book.
The 2-year USD/INR sell-buy swap auction will be held on March 8, the Reserve Bank of India (RBI) said. This will enable access to a wider set of market participants and smoothen
receivables relating to forward assets, it said.
Under the swap, a bank shall buy US dollars from the RBI and simultaneously agree to sell the same amount of dollars at the end of the swap period. The auction cutoff will be based on the premium amount in paise terms up to two decimal points.
The RBI had a long forward book of $49.1 billion as of end-December, according to its latest bulletin. Of that, net $699 million long dollar positions were to mature in up to one month, $1.2 billion in more than one to three months, while $47.2 billion were to mature in more than three months to a year.
The move will suck out rupee liquidity and potentially create space for open-market bond purchases by the RBI, analysts said. The step also comes ahead of the mega Life Insurance Corp. of India share sale, which is expected to see major inflows.
“The FX move will help suck out INR liquidity and strongly supports the RBI’s liquidity normalisation policy imperative in the short term,” said Kanika Pasricha, economist at Standard Chartered Plc in Mumbai. “We will watch out for a repeat of such a move. As an aside, it would also help realise FX gains thereby boosting RBI dividend.”
The move will be positive for the rupee and push up dollar/rupee forward premiums, said Anindya Banerjee, currency strategist at Kotak Securities Ltd.