RBI's $5 Billion Dollar-Rupee Swap Attracts Nearly Double Bids At $9.8 Billion

The Reserve Bank of India's (RBI) three-year dollar-rupee buy-sell swap auction received strong demand, with participants bidding nearly double the notified amount. Against the $5 billion on offer, total bids received stood at $9.8 billion, reflecting robust appetite from banks looking to participate in the liquidity injection exercise.

The RBI received 254 bids in total and accepted 141 of them, with the weighted average premium on accepted bids coming in at 920.64 paise. The cutoff premium was set at 910 paise, an increase of 182 paise from the last time the central bank conducted a three-year swap of this nature.

How The Swap Works

In a dollar-rupee buy-sell swap, the RBI buys US dollars from banks in the spot market and simultaneously agrees to sell the same amount back at the end of the swap period. From a bank's perspective, it sells dollars to the RBI now and agrees to buy them back at the end of three years. Banks bid a premium, quoted in paise per US dollar, for swapping the two currencies between the spot and forward legs of the transaction.

The settlement of the initial leg of the swap will take place on Friday, through which the RBI will inject rupee liquidity into the banking system. System liquidity stood at a low surplus of ₹67,285 crore as of May 25.

Why The RBI Conducted The Swap

The auction was conducted to strengthen the RBI's capacity to intervene in the foreign exchange market and prevent excessive volatility in the rupee. The rupee was under severe pressure in the past few weeks, touching the all-time closing low of 96.83 and intraday low of 96.95 against the dollar on 20 May. The currency has since recovered somewhat, strengthening back below the 96 level.

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The swap auction is part of a broader set of tools the RBI has been deploying to manage currency stability amid global headwinds, including elevated crude oil prices linked to the West Asia conflict and persistent foreign equity outflows from Indian markets.

Sources:

The Economic Times

Businessline