Reserve Bank of India’s announcement to undertake a sell/buy swap auction of $5 billion next month will likely help in leveling the rupee liquidity ahead of the expected behemoth IPO of Life Insurance Corp of India, which could lead to a gush of US dollar inflows, experts say. Through the auction, RBI will conduct a spot sale to sell $5 billion worth of US dollars to banks on March 10, 2022 in exchange of rupees, and will make a forward purchase from banks in two years on March 11, 2024. In effect, this will reduce RBI’s current foreign exchange reserves, while increasing its two-year forward USD purchases.
“Every action from a central bank has impact at two levels – direct and indirect. While direct impact is clear and can be easily interpreted (on forward premium and rupee liquidity), it is the indirect one, which makes the difference for market participants. And to our mind, the bigger and indirect objective of RBI is to create room for itself ahead of LIC IPO, to intervene in FX market, if there is some large inflows,” Kotak Securities said in a note Tuesday. As of February 20, the banking system has a surplus liquidity of Rs 6.96 crore.
Gush of liquidity ahead of upcoming IPOs
The FX swap tool would prepare the central bank to manage the gush of dollar flows ahead of the LIC IPO and other smaller IPOs of companies such as Ola, Oyo, and NSE, which are lined up in the coming months, according to a research note from Emkay Global Financial. Total IPO funding in the upcoming three months could be anywhere between $15 billion to about 18 billion, Emkay said in a note.
“IPO-related inflows in coming months (Mega LIC IPO ($9bn) + other fund raising around ($6-8bn) could buoy equities temporarily, with high-profile tech unicorns likely to attract increased international interest in Indian equities in general, although there could be caveats,” Madhavi Arora, lead economist at Emkay said.
RBI intervention to keep a check on rupee
The auctions could also be a signal from RBI that it is not comfortable with recent rupee appreciation, in light of upcoming balance sheet date (March 31) and can intervene aggressively, if needed, without much to bother on adding incremental rupee liquidity, Kotak Securities said.
“Who knows, it might create room for OMO in future as well, if rupee on its own depreciates due to some exogenous factor (Russia -Ukraine) etc. But it is too far an interpretation, as of now. Coming back to forwards, one year point should open at least 12p to 15p higher. But it will be interesting to see how market takes the indirect impact of sell-buy swap on spot,” the brokerage added.
Buy sell swap auction to manage RBI’s forward books
The central bank said in a statement Monday it will conduct an auction of USD/INR 2-year sell buy swaps, amounting to $ 5 billion, on March 8. “With a view to elongating the maturity profile of its forward book and smoothen the receivables relating to forward assets, it has been decided to undertake sell/buy swap auction of $5 billion on March 08, 2022,” it said. Under a sell buy swap auction, a bank shall buy US Dollars from the Reserve Bank in the spot market and simultaneously agree to sell the same amount of US Dollars at the end of the swap period.
RBI’s near-term forward book has been heavy, leading to the central bank consistently rolling over the maturity profile, Emkay’s Madhavi Arora said. “We note that as recent as Nov’21, the 1-3 month RBI forward maturity profile was depicting net long position of almost $11.3bn. This saw a dramatic turn by Dec’21 (mere $1.8bn), with RBI rolling over the upcoming maturities and shifting its net long position to the longer term. Net delivery of its FX long position would have led to consequent increase in RBI’s FX asset in its balance sheet and thus INR liquidity to the equivalent amount, at the time when it is trying to keep system liquidity well managed. It looks like the RBI intends to roll over their position without disturbing the markets around fiscal year-end,” Arora said.
