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    RBI may allow $5b sell-buy swap to mature on Monday, to inject Rs 40,000 crore

    Synopsis

    The Reserve Bank of India spurs capital inflows to support banking system liquidity. They manage liquidity strain from tax payments through foreign exchange market actions, repo operations, liquidity surplus, and dollar deliveries.

    RBI may allow $5b sell-buy swap to mature on Monday, to inject Rs 40,000 crAgencies
    Mumbai: The Reserve Bank of India may have shifted gears in its strategy to support banking system liquidity, with its actions in the foreign exchange market spurring large capital inflows. This is in addition to the central bank's regular repo operations aimed at ensuring that year-end tax outflows do not disrupt the money market.

    Market sources said the RBI would opt to let a $5-billion foreign exchange sell-buy swap operation mature on March 11, a move that is expected to release more than Rs 40,000 crore worth of rupee liquidity into the banking system.

    In the swap auction carried out on March 8, 2022, the RBI had accepted $5.14 billion. In a 'sell-buy' swap operation, the RBI sells dollars immediately and contracts to buy them back at a future date. Sale of dollars by the RBI drains out rupees from the banking system while purchases of the greenback inject rupee liquidity.

    In 2022, liquidity in the banking system was at a huge surplus due to the overhang of Covid-era fund injections by the RBI. However, liquidity has been at a deficit over the last six months, based on banks' borrowings from the central bank.

    Banking system liquidity typically faces strain from mid-March onwards due to corporate advance tax payments at the year-end, in addition to regular monthly outflows owing to GST payments. Addition to liquidity from the maturity of the RBI's swap operation would partly help ease the strain.

    The action in the foreign exchange forwards market also points to the expectation of the central bank taking dollar deliveries instead of opting to roll over the contract.

    "The market is awaiting what RBI would do on Monday - whether it would take delivery or roll the swap over. Market participants have been receiving premiums as they expect dollar shortage due to taking delivery. Near-term premiums have fallen by 30-40 basis points," said Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors.

    Bankers said over the past couple of weeks, the RBI had also allowed some dollar inflows boosting rupee liquidity instead of 'sterilising' the inflows.


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