RBI to inject liquidity through $5 bn dollar-rupee swap
14 March 2019
The Reserve Bank of India (RBI) on Wednesday announced plans to inject $5 billion (nearly Rs35 crore) of long-term liquidity into the system through a 3-year foreign currency swap arrangement with banks.
The swap will be in the nature of a simple buy/sell foreign exchange arrangement from the Reserve Bank side. A bank may sell US dollars to the Reserve Bank and simultaneously agree to buy the same amount of US dollars at the end of the swap period.
“In order to meet the durable liquidity needs of the system, the Reserve Bank has decided to augment its liquidity management toolkit and inject rupee liquidity for longer duration through long-term foreign exchange buy/sell swap in terms of its extant Liquidity Management Framework,” RBI stated.
“The US dollar amount mobilised through this auction would also reflect in RBI’s foreign exchange reserves for the tenor of the swap while also reflecting in RBI’s forward liabilities,” it added.
RBI said the dollar/rupee buy/sell swap auction of $5 billion for tenor of 3 years will be conducted on 26 March 2019.
Market participants, it said, would be required to place their bids in terms of the premium that they are willing to pay to the RBI for the tenor of the swap, expressed in paisa terms up to two decimal places.
The auction cut-off would be based on the premium. The auction would be a multiple-price based auction, ie, successful bids will get accepted at their respective quoted premium, says the RBI release.
Under the swap auction, minimum bid size would be $25 million and in multiples of $1 million thereafter. The eligible participants are allowed to submit multiple bids. However, the aggregate amount of bids submitted by single eligible entity should not exceed the notified amount of auction.
Category -1 authorised dealer banks are eligible entities to participate in the auction.
Once the auction window is closed, all the bids would be arranged in descending order of the swap premium quoted and the cut-off premium would be arrived at the premium corresponding to the notified US dollar amount of the auction.
Successful bidders would be those who have placed their bids at or above the cut-off premium. All bids lower than the cut-off premium would be rejected.
There will be provision of pro-rata allotment should there be more than one successful bid at the cut-off premium.
The settlement of the first leg of the swap will take place on spot basis from the date of transaction and the Reserve Bank will credit the rupee funds to the current account of the successful bidder and the bidder needs to deliver US dollars into the RBI’s nostro account.
In the reverse leg of the swap transaction, rupee funds will have to be returned to the Reserve Bank along with the swap premium to get the US dollars back.
The banks would be exempted from the ISDA requirements for the purpose of these swaps.
Swaps under the auction, once undertaken with the Reserve Bank cannot be cancelled and no request for any modification or revision to the same would be entertained.
The auction window will remain open between 9.30 AM to 11.00 AM. The result of the auction will be announced on the same day.
RBI said it reserved the right to decide on the quantum of US dollar amount to be accepted in the swap auction. It may accept offers for less than the aggregate notified amount or accept marginally higher than the notified US dollar amount due to rounding-off effects.
Alternately, it may accept or reject any or all the offers either wholly or partially without assigning any reason, it added.