RBI’s $10 billion FX swap to sail through on arbitrage, corporate demand, bankers say

MUMBAI: The arbitrage opportunities between onshore and offshore markets alongside an expected pick up in corporate participation are likely to help the Reserve Bank of India’s $10 billion foreign-exchange swap sail through smoothly, bankers said.

Bids for the swap will be submitted by banks in the first half of Tuesday, and the results will be declared later in the day.

It involves the RBI buying dollars and injecting rupees in the first leg, which will be settled on Friday, before reversing the transaction three years later.

The operation will inject $10 billion of rupee liquidity, part of measures unveiled by the central bank last month. The announcement of the swap helped rein in a surge in dollar-rupee forward premiums in late December.

“The swap should sail through, with bids likely north of $15 billion. An arbitrage of about 25–30 basis points (between the 3-year offshore and onshore rates) will draw in offshore players,” a senior treasury official at a foreign bank said.

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

An FX salesperson at another foreign bank said he has been pitching the opportunity to clients, emphasizing the relative value on offer from the spread between onshore and offshore rates.

Both spoke on condition of anonymity since they are not authorised to speak to the media.

The Reserve Bank of India’s smaller $5 billion swap of the same tenor last month saw limited corporate participation, bankers said.

“This time, taking into account the longer window between the announcement and the auction, we expect corporate participation to be higher on a relative basis,” a trader at a large private-sector bank said.

The main point of debate among bankers is where the cut-off will be. Some expect a cut-off well below market levels, similar to the previous auction while others say they expect a result closer to prevailing levels. The 3-year FX forward swap points were last at 7.27 rupees.

“These swap auctions are a great way to distribute the RBI’s forward short basket in a way that minimises rollover risk and market distortion through lumpy FX and open market operations,” said Tanay Dalal, senior vice president for business and economic research at Axis Bank.

“With FX smoothing likely to continue, these swaps will likely be able to absorb excess USD supply in the near end,” Dalal said.