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2 Apr 2019

RBI Long Term USD/INR Swap

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RBI said in order to meet durable liquidity need of the system, it has decided to inject Rupee liquidity for a longer duration through long-term foreign exchange Buy/Sell swap.

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Arjun Parthasarathy

RBI said in order to meet durable liquidity need of the system, it has decided to inject Rupee liquidity for a longer duration through long-term foreign exchange Buy/Sell swap. USD/INR Buy/Sell swap auction of USD 5 billion for tenor of 3 years will be conducted on 23rd April 2019. Earlier on 26th March 2019, RBI had bought USD 5 billion through similar swap auction in a bid to ease liquidity, the swap on immediate basis will add liquidity into the system and also adds to RBI’s fx reserves. However, as it is a swap, RBI has created a long term liability where it has to give the USD back to banks and hence on a net basis, there will be no change in fx reserves. The forward liability of RBI will be reflected in the outstanding forward position while the spot transaction will be reflected in RBI fx purchases.

RBI USD/INR Buy/Sell Swap auction

Swap Amount (USD Billion)

Auction date

Auction Time

Near Leg/Spot Date

Far Leg Date

5

23-Apr-19

9.30AM-11.00AM

25-Apr-19

25-Apr-22

RBI Long Term USD/INR Swap – Banks Get Cheap 3 year Funds

RBI injected close to Rs 345.61 billion liquidity through its USD/INR swap. RBI received 240 bids worth USD 16.31 billion at an average premium of Rs 7.92. The central bank accepted 89 offers totaling USD 5.02 billion at a cut-off premium of Rs 7.76.

In this swap, RBI received USD from banks and it will payback the USD at 76.62 a dollar 3 years down the line, which will be irrespective of the exchange rate.

Forward Premia

The forward premia is calculated at 3.62% annualised.  USD-INR spot rate Rs 68.91, premia is Rs 7.76, 3-years forward rate comes to Rs 76.67. CAGR for 3-years is at 3.62%. Given that Repo can change over a period of 3 years, the three year OIS rate of 5.87% is more relevant to judge RBI cost. RBI cost is 5.87% – 3.62%.

Cost to RBI and Banks

The cost to RBI is the difference between Repo rate of 6.25% and 3.62%, as RBI can lend to banks at the repo rate rather than give them funds at 3 year USD/INR forward rate. Given that the Repo is a variable rate, the more effective cost is 3 year OIS (Overnight Indexed Swap), which uses floating rate benchmark as the overnight call money rate, which usually trades at around the repo rate. 3 year OIS is trading at 5.87% and hence RBI cost is 5.87% – 3.62%.

The cost for banks is the 6-month LIBOR  at 2.58%. However since Libor is floating, banks in order to hedge the cost will pay the 3 year USD/IRS Swap rate, which uses Libor as the floating rate benchmark. The 3 year USD/IRS is at 2.26%. Technically banks borrowing cost is 2.26% plus 3.62% = 5.88%.

RBI Long Term USD/INR Swap – Effect on Markets

RBI announced a Long Term USD/INR Buy – Sell swap auction as a liquidity management tool. This is the first time RBI has explicitly stated that it will use fx operations for liquidity management. The swap on an immediate bases adds liquidity into the system and also adds to RBI’s fx reserves. However, as it is a swap, RBI has created a long term liability where it has to give the USD back to banks and hence on a net basis, there will be no change in fx reserves. The forward liability of RBI will be reflected in the outstanding forward position while the spot transaction will be reflected in RBI fx purchases.

The USD/INR swap is for a 3 year maturity period for USD 5 billion. Banks will sell to RBI at current spot rates, which as of today is Rs 69.60. Banks will sell to RBI USD 5 billion and will receive Rs 340 billion in liquidity.

At maturity, RBI will sell to banks USD 5 billion in return for INR. The forward rate will be spot rate Rs 69.60 plus the forward premia, which will be determined in the auction. Forward premia will be cost of the current liquidity, which would be 3-year borrowing cost for the banks.

Swap Effects on the Market

The swap will create a demand for USD as RBI is buying spot and if there USD flows are weak, the INR will depreciate against the USD. However, if flows are strong, then INR may not witness much depreciation. The market reaction to the swap announcement was muted, with the INR actually strengthening against the USD, indicating that the flows are strong.

The market will see long term liquidity infusion and this will help money markets and bond markets and yields can fall if other factors are supportive of yields.

RBI will have more room to participate in the forward markets as it has created a long term forward sale of USD and it can hedge the position periodically by creating positions of different maturities. The swap can also improve the liquidity on the long term forward markets, liquidity is usually concentrated in the 1 year and below maturity segments in the forward markets.

Capture

RBI USD/INR Swap Auction

To infuse durable liquidity RBI has decided to conduct longer duration  foreign exchange Buy/Sell swap auction.The USD amount mobilized through this auction would reflect in RBI’s foreign exchange reserves for the tenor of the swap and in RBI’s forward liabilities. USD/INR Buy/Sell swap auction of USD 5 billion for tenor of 3 years will be conducted on 26th March 2019.

Operational flow is given below –

·          Authorised Dealers (ADs) – category-1 banks are eligible to participate in the auction.

·         The swap is a simple buy/sell foreign exchange swap from the Reserve Bank side. A bank has to sell USD to the RBI and simultaneously agree to buy the same amount of USD at the end of the swap period.

·         Under the swap auction, minimum bid size is USD 25 million and in multiples of USD 1 million thereafter. The eligible participants are allowed to submit multiple bids.

·         In the first leg of the transaction, the bank has to sell USD to the RBI at FBIL Reference Rate of the auction date. 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 have to be returned to the RBI along with the swap premium to get the US Dollars back.

·         The auction cut-off is based on the premium amount in paisa terms up to two decimal points. The market participants would be required to place their bids with 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. Successful bidders are those who have placed their bids at or above the cut-off premium. All bids lower than the cut-off premium are rejected.

·         There is provision of pro-rata allotment should there be more than one successful bid at the cut-off premium.

·         The banks can be exempted from the ISDA requirements for the purpose of these swaps.

 

Disclaimer:

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