RBI Uses Over $2 Billion FX Swaps to Offset Spot Intervention Liquidity Drain

According to Reuters, the Reserve Bank of India (RBI) is taking action to restore enough supply of dollars through foreign currency (FX) swaps. Over the past two days, about $2 billion has been put into circulation as a result of dollar spot sales, while addressing liquidity constraints on the banking system due to dollar/spot sales.

The Indian rupee fell to an all-time low of 91.74, having lost 0.8% on Wednesday. The RBI has stepped up its dollar spot sales to counter the outflow of equity, the influx of gold imports, and a trend toward greater use of hedging instruments.

The FX swaps will help mitigate these issues.

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Spot Interventions Drain Liquidity

When banks sell dollars, it creates a flow of dollars into the banking system, but when FX swaps are executed, rupees are taken out of circulation, and the banks with dollar/rupee payments must have a corresponding flow of dollars and rupees to create a balanced account.

Bankers are reporting swap activity on Tuesday and Wednesday across different maturities, with one estimate of over $3 billion traded. Both days had above-average trading volumes.

On Wednesday, banking liquidity reached a 60 billion rupee depletion.

RBI's Dual Strategy in Action

FX swaps will only work if paired with regular FX spot transactions, but this week they are being used to help minimise dollar/rupee hedging costs, where the forward premium on a one-year rollover has been reduced by approximately 10 basis points.

The above strategy allows the RBI to handle fluctuations in the rupee without increasing supply issues. Bond purchases will provide further support.

Broader Pressures and Outlook

Rupee problems continue due to equity outflows, gold imports, and hedge stockpiling. The central bank's continuous intervention hasn't alleviated the ongoing liquidity deficit. 

Bankers expect swaps to continue past interventions, and the RBI remains silent regarding details of the process. 

RBI uses these tools as both stabilising agents from volatility and to maintain liquidity in the system. Markets will monitor the path of the rupee and changes in liquidity closely.