RBI’s $5 billion FX swap to sail through, high hedging costs cloud corporate appetite

MUMBAI: The Reserve Bank of India’s three-year dollar–rupee swap is expected to be fully subscribed, though bankers say a run-up in hedging costs is likely to keep corporate participation muted.

The RBI’s dollar–Indian rupee swap will absorb $5 billion from the market and inject an equivalent amount of rupees, as part of the central bank’s efforts to ensure ample banking-system liquidity to aid the transmission of rate cuts, with the transaction set to reverse after three years.

Bankers expect demand to be sufficient for the auction to be fully subscribed. However, the jump in hedging costs is likely to leave corporate interest far more muted than in March’s larger, similar-tenure operation.

When the RBI last conducted a three-year $10 billion swap in March, three-year forward points were around 6 rupees on the auction date. They have since climbed to just under 8 rupees, hitting a more than a two-and-a-half-year high last week.

For importers, higher forward points translate into a higher cost of hedging future dollar payables.

The swap auction is expected to be fully subscribed, supported by surplus dollar liquidity in the banking system, DBS Bank India Executive Director and head of trading Sameer Karyatt said.

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However, considering the “prevailing market dynamics”, marked by elevated hedging costs for importers, he does not expect “significant interest” from corporates.

A senior banker at a mid-sized private sector bank concurred with Karyatt, saying corporate “enthusiasm” is expected to be lower this time and that he has been advising his clients against bidding at the auction.

The banker expects bidding to be “less competitive”, with the cutoff at the auction likely to be “at least” 15–25 paisa below prevailing market levels.

Three-year forward premiums were quoted at 8.02/8.18 rupees on Monday.

“There’s little doubt the full $5 billion will be taken up, the real focus is where the cutoff prints,” a forex swap trader at a bank said.

This will be the RBI’s third three-year swap auction this year, leaving it to manage about $25 billion in 2028 maturities.

The swap comes amid persistent pressure on the rupee, with the currency sliding to an all-time low of 90.7850 per dollar on Monday. Bankers said the weakness is likely to curb corporate participation further.