RBI Sets High Cut-Off Premium At Debut Dollar-Rupee Swap Auction

The Reserve Bank of India on Tuesday set 7.76 rupees premium for its first dollar/rupee three-year buy-sell swap auction and accepted the entire planned $5 billion on sale.

The cut-off levels, higher than market ones, showed the RBI's intention to not distort the forward forex yield curve and strong demand from banks to lock in their dollar funds with the central bank for three years, dealers said.

In the inter-bank cross-currency swap, 3-year dollar/rupee swaps were quoted at 7.7 rupees per dollar on Tuesday, implying an annualised cost of 3.7 percent to swap rupees for dollars.

The cut-off premium of 7.76 rupees translates into an annualised 3.75 percent, which is higher than the market rate, dealers said.

Total bids received at the auction were an overwhelming $16.3 billion, the RBI said in a release. 

About two weeks ago, the RBI announced it would inject  rupees into a cash-starved banking system through dollar/rupee buy-sell swap auction. 

This new tool is meant to give the central bank greater flexibility in managing banking system cash while helping soak up any potential large dollar inflows that could make the rupee  rise sharply.

According to local newsagency NewsRise, the cut-off for the 3-year swap was expected to be 7.60 rupees. 

The fact it was higher "shows that there was huge interest from banks to tender dollars to the RBI given the large supply of dollars in the market now," said a dealer at a foreign bank.

The rupee fell briefly to 68.97 to the dollar from 69.88 before the auction result but recovered on abundant dollar liquidity.

While market participants expect the RBI to conduct a few more such auctions, they anticipate these will be held when foreign investors are positive on emerging markets to ensure the market has enough dollars to offer at the swap. 

"It was a successful auction as RBI was smart to time it well. We expect RBI to conduct more such auctions given the strong demand at this auction," said a dealer at a state-owned bank.

India has received nearly $6 billion of inflows this year  as foreigners flock to the equity market on expectations that Prime Minister Narendra Modi might win a second term in office, his ratings boosted by a surge in nationalist sentiment following military clashes between India and Pakistan.

A surge in flows has pushed up the rupee by 2.7 percent this month, helping it to recover a large part of its lost ground last year. It has gained 1.4 percent in 2019.

(Reuters)