Expectations of the Reserve Bank of India (RBI) taking delivery of a $5 billion forex swap maturing next week will create a dollar crunch in the forex market, experts said. However, they added that the move would add durable liquidity of around Rs 50,000 crore in the banking system.
In a sell/buy USD/INR swap deal, the RBI sells dollars to banks and buys them at a later date.
“The dropping overnight swap rate indicates that there will be a dollar crunch. Additionally, the RBI's sell/buy USD/INR swap matures on March 11. The RBI may look forward to take delivery of dollars due to tight rupee liquidity conditions,” said Kunal Sodhani, vice president of Shinhan Bank India.
Adding to this, Dilip Parmar, a foreign exchange analyst at HDFC Securities, said the delivery of a swap action would lead to an infusion of rupee liquidity in the system.
On March 11, $5 billion from a USD/INR Sell Buy swap auction conducted by the central bank in March 2022 will mature.
Experts said the maturity is expected due to likely heavy inflows of foreign funds to India. Also, there are expectations of further inflows in the coming months on account of the inclusion of Indian bonds in global bond indices, which will improve dollar liquidity with banks.
According to NSDL data, Foreign Portfolio Investors had pumped Rs 43,281 crore into the debt market as of March 6.
The current dollar crunch in the market is unlikely to have any major impact on spot exchange rates. “I don't see a direct impact on Spot, but yes, it may entice importers to hedge some of their exposure,” Sodhani added.
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Easing forward premium
Forward premium rates have been going down in the last few days on expectations of the RBI taking delivery of the swap auction. According to Bloomberg data, one-month, three-month, six-month, and one-year forwards have seen a sharp fall.
Explaining this, Sodhani said premiums have been falling for the past few trading sessions as expectations of rate cuts by the US Fed, predicted to start in March, have been pushed back to June. Forward premiums are receiving good premiums, which is pushing them lower along with overnight swap rates, he added.
“We believe the supply of dollars will push the premium lower and the rupee could head north to 82.80 against the US Dollar,” HDFC Securities' Parmar added.
Also read: Gold hits 1-month high as dollar dips after US PCE data
Durable liquidity
The maturity of a swap will add durable liquidity in the banking system ahead of advance tax and goods and services tax outflows from the banking system.
Currently, liquidity in the banking system is at a surplus of around Rs 63,631.86 crore. After the swap matures, around Rs 50,000 crore will be added to the system.
However, as per the experts, there will be outflows of over Rs 2 lakh crore in GST and advance tax. This will again put systemic liquidity in deficit towards the end of March, the experts added.
In the last few days, liquidity in the banking system has improved in the wake of the government's month-end spending. It turned into a surplus after having a huge deficit of over 2.30 lakh crore in the last week of February.
The surplus liquidity helped short-term rates, especially the overnight call money rate, to ease sharply and trade below the repo rate.
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