Context:
RBI conducted a buy sell swap auction of $10 billion USD/INR with a three year tenure.
Strong demand: Received bids amounting to $16.23 billion, accepted bids amounting to $10.06 billion from 161 out of 244 bids.
Cutoff premium: Not fixed with ₹6.55 as compared to lower than market expectations (₹6.62).
Average premium: ₹6.73.
Market Reaction and Liquidity Deficit
- Patterned on Banking system liquidity deficit: ₹1.81 trillion (now 11th consecutive week).
- Rupee depreciation: Closed at ₹87.51/$ compared with ₹87.20 at the previous session.
- Intervention by RBI: Selling dollars through PSU banks to try and curb the volatility.
- Dollar Index: Surged to 107.37 from 106.62, making a mark on the currencies across the globe.
- Forex Reserves: Increased by $4.7 billion to $640 billion, mainly due by foreign currency asset gains ($4.2 billion).
Market Participants’ Learnings
- Corporate sector demand was strong, banks however wanted much higher premiums.
- Banks viewed RBI as a safer counterparty, therefore they did not take into consideration capital charge considerations.
- Forward premiums declined after the auction results.
- Key resistance levels: Downward supports for rupee are at ₹86.6 and resistance is at ₹87.5.
In efforts to moderate rupee volatility while continuing to address liquidity constraints, RBI now resorts to swap auctions. As global trade tensions continue to escalate and U.S. tariff policies change, it is suspected that in the future RBI’s interventions will continue to be closely watched.
