Indian central bank's heavy FX swaps drag premiums to 2-month low ahead of policy
- One-year hedging costs have dropped from the mid-May peak of 3.50% to 2.92%
MUMBAI: Aggressive buy-sell dollar/rupee swaps by the Reserve Bank of India over the last ten days have compressed FX hedging costs to two-month lows in the run-up to a crucial monetary policy decision.
One-year hedging costs have dropped from the mid-May peak of 3.50% to 2.92%. In parallel, the rupee has strengthened from a record low of 96.96 per U.S. dollar to 94.7275, before dipping to 95.6875.
The recovery in the rupee and fall in forward premiums have been largely spurred by RBI’s spot dollar sales alongside simultaneous buy-sell swaps that counter the impact FX interventions have on domestic rupee liquidity.
The plunge in premiums comes in the lead-up to Friday’s RBI policy decision, where the central bank is expected to hold rates despite the rupee’s 6.5% decline this year amid an Iran war-driven oil shock and equity outflows.
The policy decision comes at a time when markets expect steps to bolster dollar inflows and support the rupee.
A treasury official at a large private bank said it was possible the “engineered fall” in premiums was linked to measures the RBI may announce, without elaborating further.
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Shifting sands
There has been a notable shift in the RBI’s FX swap operations, triggering a significant repricing in forwards, a currency trader at a mid-sized private-sector bank said, pointing out that the central bank had previously been largely absent from this market.
Market estimates of the RBI’s swap activity vary widely, with lower-bound estimates putting it at roughly $2 billion over the past 10 days.
The swap operations have been concentrated in the 12-to-18-month segment, a change from the typical reliance on swaps of less than one year.
This has pushed down two-year forward points by more than one rupee from recent peaks.
The longer-tenor swaps provide the central bank flexibility in managing its ballooning forward book, an economist at a private-sector bank said.
All the bankers spoke on condition of anonymity as they are not authorised to speak publicly.
Liquidity management
RBI’s buy-sell swaps have not fully neutralised the liquidity impact of its spot FX intervention, bankers said, prompting it to inject funds into the banking system through variable rate repos.
The central bank has conducted 10 such auctions over the last 20 trading sessions.
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