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Rupee rides higher on RBI’s dollar swap auction success

The auction, which received an overwhelming response with RBI getting bids worth $18.65 billion, is expected to inject Rs 35,000 crore of money into the banking system

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Rupee gained some lost ground on Tuesday after Reserve Bank of India (RBI) conducted the dollar–rupee swap auction, the second one in less than a month. The central bank had offered to buy $5 billion from banks to release rupee liquidity to improve the capital position during the elections. The auction, which received an overwhelming response with RBI getting bids worth $18.65 billion, is expected to inject Rs 35,000 crore of money into the banking system.

RBI will also have a open market operation (OMO) next month where it will buy back bonds worth Rs 25,000 crore to improve the liquidity in the banking system.The rise in oil prices had pushed down the rupee by 32 paise on Monday when it closed at a two-week low of 69.67 to the dollar. But on Tuesday despite slow foreign inflows, the domestic unit recovered to end the day 5 paise higher at Rs 69.62 against the dollar after banks began selling excess dollars in the spot market.

“RBI's dollar–rupee swap auction lifted the rupee. RBI had on offer $5 billion but received bids worth $18.65 billion so banks would have excess dollars which they would have got into the spot market or got into some swap arrangement. The depreciation of the rupee for the last few days was primarily due to the fear of inflation creeping back, driven by a surge in oil prices and fears of a food inflation riding on a poor monsoon,” said Ritesh Bhansali, assistant vice president - forex risk consulting at Mecklai Financial.

“If the ruling government gets a comfortable majority, the inflow of dollars will go on unabated and it can fund the widened trade defict. But if there is a fractured verdict, then the inflows could be impacted. There are a lot of worries on whether India can import oil from Iran without inviting US sanctions but I don't think the Trump administration would impose sanctions,” said M S Gopikrishnan, former head of macro trading and financial markets at Standard Chartered Bank.

Earlier on March 26, the central bank had bought $5 billion through similar swap auction in a bid to ease liquidity ahead of elections.

In the second tranche of auction that took place on Tuesday, banks sold dollars to the RBI at Rs 69.67 apiece, the closing price of the currency on Monday. Three years later, they would buy back the dollars, in rupee terms, at Rs 78.05 apiece – the exchange rate that includes the cut-off premium. The cut-off premium, the threshold for the banks to receive any allotment, was set at Rs 8.38. The swap will be a simple buy/sell foreign exchange swap from the central bank.

The Trump administration has said that countries that buy oil from Iran would no longer receive any exemptions and would face US sanctions, a move that could hit countries like China and India. The existing exemption ends on May 2, 2019. But experts say though palpitations are going to be there, it is unlikely that the Trump administration would hurry with sanctions. The price of Brent crude, the global oil benchmark, rose over 3% to above $74 a barrel on Monday, the highest intra-day price in nearly six months.

SAILING SMOOTHLY

  • Rs 25K cr – bonds RBI plans to buy via OMO next month
     
  • $18.65 bn – Bids central bank received in Monday’s auction
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