RBI Sell/Buy Swap Auction

February 23, 2022

Reserve Bank of India (RBI) recently announced to undertake a “sell/buy swap auction” of USD 5 billion in March, 2022.

Highlights

The Sell/Buy Swap Auction will help in levelling the liquidity of rupee in the light of expected behemoth IPO of Life Insurance Corp of India.
This move will lead to inflow of US dollar.
RBI will conduct a spot sale to sell USD 5 billion to banks in exchange of rupees, through this auction on March 10, 2022.
On March 11, 2024, it will make a forward purchase from banks in two years.
Forward purchase will help in reducing RBI’s current foreign exchange reserves and increase its two-year forward USD purchases.

What is a swap auction?

Under the swap auction, a bank sell US dollar to the RBI. It is also agreed to buy the same amount of US dollars at the end of swap period. It is different from Open Market Operations (OMOs), materially. Under OMOs, central bank buys and sells government securities in open market. While, in swap transaction only authorised dealers are allowed to deposit US dollars in exchange for rupees.

Fixed Exchange Rate

Swap auction is done with an agreement to reverse the transaction at fixed exchange rate by the end of 3 years. Final exchange rate is decided by an auction where banks put bid on forward premium. Minimum bid size is USD 25 million and in multiples of USD 1 million thereafter.

Objectives of Swap Auction

Swap Auction is done with the objective of meeting durable liquidity needs of the system. It injects rupee liquidity for longer duration by means of long-term foreign exchange Buy/Sell swap.