RBI’s liquidity mop-up via FX swaps offers a channel of support for rupee

MUMBAI: The Reserve Bank of India’s use of foreign-exchange swaps to drain surplus rupee liquidity is pushing up forward premiums, indirectly offering support to the rupee. The RBI conducted dollar/rupee sell-buy swaps for a second straight day on Thursday, traders said, with operations seen in September and December maturities. Most of the swaps were concentrated in December. Forward premiums soared in response, with the one-year annualised implied rate up almost 30 basis points over two days. Near-term tenors saw more pronounced moves, with the one-month premium climbing 90 basis points. Sell-buy swaps can potentially support the rupee by improving hedging incentives, analysts at ANZ Bank said in a note By pushing forward premiums higher, the RBI’s swaps raise the cost of betting against the rupee and hedging dollar liabilities. That may curb importer demand for forwards while encouraging exporters to sell dollars. The effect offers a modest cushion for the rupee at a time when it has been weighed down by a renewed rally in crude oil, driven by the biggest wave of attacks on shipping since the start of the 6-month old conflict between the U. S. and Iran. India central bank likely deploys FX swaps to mop up overseas deposit-driven liquidity, traders say One trader pegged the quantum of swaps conducted on Thursday at around $600 million to $700 million, in addition to $1 billion conducted on Wednesday. Another trader said the RBI had conducted “less than $1 billion” in swaps so far on Thursday. Hedging economics The shift in hedging costs comes against a backdrop of persistent importer demand for dollar hedges and a reluctance among exporters to sell their dollar earnings, a combination that has contributed to sustained flow imbalances in the rupee market. Hedging costs are only one part of the equation that companies consider when deciding whether to buy or sell dollars forward. The spot rate and expectations for the rupee’s future trajectory are also key considerations. For exporters, the jump in forward premiums, coupled with the rupee’s renewed weakness to 95. 35 per dollar, offers more reason to sell dollars forward. However, higher forward premiums alone may not be enough to bring them back to the market in a meaningful way, an FX salesperson at a bank said, requesting anonymity since he was not authorised to speak to the media. “While significantly higher forward premiums certainly improve the incentive to sell dollars, unless the oil price trend changes, exporters are likely to remain cautious. ”

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