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RBI’s 5bn USD-INR sell-buy swap auction

March 09, 2022

RBI’s 5bn USD-INR sell-buy swap auction
Reserve Bank of India’s declaration to attempt a sell/buy swap auction of $5 billion one month from now will probably help in evening out the rupee liquidity in front of the expected behemoth IPO of Life Insurance Corp of India, which could prompt a spout of US dollar inflows, experts say.

Through the auction, RBI will lead a spot sale to sell $5 billion worth of US dollars to banks on March 10, 2022 in exchange for rupees, and will make a forward buy from banks in two years on March 11, 2024. In effect, this will lessen RBI’s current foreign exchange reserves, while increasing its two-year forward USD
purchases.
 
“Every activity from a national bank has sway at two levels direct and indirect. While the direct effect is clear and can be effectively deciphered (on forwarding premium and rupee liquidity), it is the roundabout one, which significantly impacts market members. What’s more, to our psyche, the greater and roundabout target of RBI is to make space for itself in front of LIC IPO, to mediate in FX market, in the event that there are a few large inflows,” Kotak Securities said in a note Tuesday. As of February 20, the financial framework has excess liquidity of ₹6.96 crore.
 
The FX trade apparatus would set up the national bank to deal with the spout of dollar streams in front of the LIC IPO and other smaller IPOs of organizations like Ola, Oyo, and NSE, which are arranged before very long, as per an exploration note from Emkay Global Financial.
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