RBI's $5 billion forex swap maturity set to impact banking liquidity

Synopsis

A $5 billion dollar-rupee swap from late January is set to reverse on Monday, potentially removing ₹43,000 crore from the banking system if the RBI delivers dollars fully. This operation, part of a series to ease liquidity, coincides with existing surplus liquidity and an upcoming CRR cut.

Mumbai: The reversal of a $5-billion dollar-rupee buy-sell swap conducted late January is scheduled on Monday, potentially draining about ₹43,000 crore from the banking system if the Reserve Bank of India (RBI) chooses to give the delivery of the dollars entirely, bank treasury dealers and economists said.

The operation marks the second leg of a six-month swap, through which the RBI initially purchased dollars in exchange for rupees to inject domestic liquidity. Upon maturity, the RBI returns dollars to the market in exchange for rupees, thereby absorbing liquidity.

The January swap was the first of three such operations-totalling $25 billion-carried out between January and March to ease tight liquidity conditions.

Of this, the first swap is set to mature on Monday.

Treasury dealers and economists said that the RBI can either give the dollar delivery, which will simultaneously drain out rupee liquidity, or roll over the swap.

Currently, liquidity surplus in the banking system is ₹2.86 lakh crore. With liquidity currently in surplus, the RBI is expected to allow the $5 billion swap to mature on Monday, draining rupee funds from the system.

The upcoming cut in the cash reserve ratio, effective next month, is also set to release additional liquidity into the banking system. Still, some traders and economists say the RBI could opt to partially roll over the swap to limit dollar outflows, especially after the rupee's recent sharp decline against the greenback.

"The RBI has been gradually reducing its forward book size by allowing near-term swaps to mature. But given the recent rupee depreciation, it may not allow full maturity because doing so will exert pressure on the rupee," said Gaura Sen Gupta, chief economist at IDFC First Bank.

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