RBI's $10 Billion Forex Swap Oversubscribed More Than 2x, Cutoff Rate Set At Rs 5.86

The Reserve Bank of India (RBI) held an auction on Monday to boost rupee liquidity and the 3-year dollar/rupee buy-sell swap auction was oversubscribed by a little over two times, with the cutoff rate set at Rs 5.86.

What Will The Reserve Bank Do With This Swap?

As part of the swap, the central bank will inject liquidity amounting to $10.04 billion equivalent of rupees into the banking system on Wednesday.

This transaction will be reversed in three years.

Additionally, the swap is also part of the series of measures that the central bank has taken to ease a liquidity crunch in the banking system.

Last Friday, the liquidity deficit stood at about Rs 2 trillion ($23.27 billion).

The central bank through several measures such as open market bond purchases, longer-tenor repo operations, and FX swaps, before Monday's auction injected approximately $64 billion worth of rupees into the system.

The RBI has set the cutoff rate at Rs 5.86, which is lower than Rs 6.55 set for a similar seized duration auction which was held late last month.

The weighted average premium of the bids accepted was Rs 5.92, as compared to Rs 6.73 in the previous auction, the central bank added.

What Is The Purpose Of A Forex Swap?

A Forex (FX) swap allows parties to exchange principal and interest payments in different currencies, enabling them to manage currency and interest rate risks, and access foreign markets.

Foreign exchange swaps are useful for borrowing or lending amounts without taking out a cross-border loan. It also eliminates foreign exchange risk by locking in the forward rate, making the future payment known.

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