The Reserve Bank of India’s (RBI) $10 billion dollar-rupee swap auction attracted $16.23 billion in bids, reflecting strong demand amid a ₹1.81 trillion liquidity deficit. RBI accepted 161 bids worth $10.06 billion at a cut-off premium of ₹6.55. The auction increased rupee liquidity, with notable corporate sector participation. The rupee depreciated to 87.51 against the dollar, influenced by global trade tensions. RBI intervened to curb volatility, while forex reserves rose by $4.7 billion, showcasing effective measures to stabilize the economy.
The Reserve Bank of India (RBI) conducted a $10 billion US dollar-rupee buy-sell swap auction for a three-year period on Friday, attracting bids worth $16.23 billion. This impressive response highlights robust demand, especially during a persistent liquidity deficit in the banking sector.
This auction marked the second such initiative by the central bank, following a $5 billion six-month swap conducted on January 31.
Out of 244 bids submitted, the RBI accepted 161 bids totaling $10.06 billion. The cut-off premium was set at ₹6.55, slightly below market expectations, while the average premium on accepted bids stood at ₹6.73. Commenting on the outcome, the treasury head of a private bank noted, “The demand was stronger than expected. The cut-off was seen at around ₹6.62.” He further added, “The forward premiums eventually fell after the auction result.”
A currency swap is a mechanism where the RBI buys US dollars from banks in exchange for rupees, with a commitment to sell the dollars back at a later date. This process effectively increases rupee liquidity in the banking system. Market observers noted strong participation from the corporate sector, while banks sought higher premiums.
“A lot of participants, especially banks, would have bid at the tail in anticipation that RBI will receive a premium aggressively. 83 of 244 bids, which means almost one-third, were not accepted,” stated Abhishek Goenka, CEO of IFA Global. He further explained, “It did not make a lot of commercial sense for banks to bid too aggressively given RBI is in a rate cut cycle and the cost of funds is not likely to increase dramatically in the foreseeable future. The incentive for banks would have been that it does not exhaust counterparty limits, as the counterparty in this case is the RBI. The banks would therefore not have any capital charge considerations.”
As of Thursday, the banking system faced a liquidity deficit of ₹1.81 trillion, marking the eleventh consecutive week of deficit, according to RBI data.
Meanwhile, the rupee depreciated by 31 paise against the US dollar on Friday, closing at 87.51 compared to the previous close of 87.20. Concerns over a potential trade war contributed to this drop, following US President Donald Trump’s announcement of impending tariffs on Canada and Mexico, along with additional tariffs on China. In response, Canada vowed swift retaliatory measures. The dollar index climbed to 107.37 from 106.62, reflecting the greenback’s strength against a basket of six major currencies. The broader equity indices also witnessed a nearly 2% decline on Friday.
Market participants observed that the RBI intervened in the foreign exchange market via dollar sales to manage excessive volatility. “There was intervention today (Friday); the PSU banks were the major participants in the market,” said a treasury head at another private bank. He added, “The 87.50 per dollar level is crucial. The rupee traced back 4-5 paise to 87.50 per dollar. We will have to see where the dollar index moves from here.”
India’s foreign exchange reserves experienced a significant boost, rising by $4.7 billion to reach $640 billion during the week ending February 21. This increase was driven by a $4.2 billion rise in foreign currency assets and a $426 million increase in gold reserves. A treasury head at a state-owned bank remarked, “The data shows there is two-way intervention with downward resistance at 86.6 and upward at 87.5.” He further noted, “Partially it is a valuation effect, but the RBI was the net buyer in the week.”
This auction and related developments underscore the RBI’s proactive measures to stabilize liquidity and manage currency volatility, ensuring resilience amid global and domestic challenges.
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