India’s central bank plans to sell dollars to banks and take out rupee liquidity via a forex swap, a move that will help the monetary authority manage liquidity in the banking system ahead of the country’s biggest share sale.
The Reserve Bank of India will enter into sell-buy swaps worth $5 billion with banks on March 8 to elongate the maturity profile of its forward dollar book, it said in a statement late Monday after the close of markets. The step comes ahead of the Life Insurance Corp. of India initial share sale due in March, which is expected to bring in major foreign inflows.
The move pushed the dollar/rupee one-year forward premium higher by 28 basis points to 4.37%. The rupee fell 0.4% against the dollar along with most other emerging Asian currencies, weighed down by surging crude prices on Ukraine tensions.
The FX swap tool would help RBI to manage the gush of dollar inflows ahead of the IPO pipeline for the coming months, amounting to as much as $18 billion, said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd. It looks like the RBI intends to roll over their position without disturbing the markets around fiscal year-end, she said.
The RBI had a long forward book of $49.1 billion as of end-December, according to its latest bulletin. Of that, net $699 million long dollar positions were to mature in up to one month, $1.2 billion in more than one to three months, and $47.2 billion in more than three months to a year.
The yield on the 10-year bond rose three basis points to 6.73%.
“The FX move will help suck out INR liquidity and strongly supports the RBI’s liquidity normalization policy imperative in the short term,” said Kanika Pasricha, an economist at Standard Chartered Plc in Mumbai. “We will watch out for a repeat of such a move. As an aside, it would also help realize FX gains thereby boosting RBI dividend.” – Bloomberg.
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