RBI CONDUCTS $5 BILLION DOLLAR-RUPEE SWAP AUCTION Overview:

GS3 ECONOMIC DEVELOPMENT

• The Reserve Bank of India (RBI) conducted a $5 billion dollar-rupee swap to inject liquidity into the Indian financial system amidst ongoing liquidity deficits and global market concerns.
• The operation attracted $25.6 billion in bids, showing strong demand for dollars.
• The transaction will be reversed on August 4, when the RBI will sell back the dollars at a forward rate.

Dollar-Rupee Swap Process:

• In this swap, the RBI buys dollars from financial institutions in exchange for Indian rupees, enhancing liquidity in the banking system.
• The forward rate is based on the current spot rate plus a premium, aimed at maintaining forex market stability.

Liquidity Trends:

• The Indian banking system has faced a liquidity deficit since mid-December, with the gap reaching Rs 2.22 lakh crore as of January 30.
• RBI’s actions, including open market operations (OMO), aim to address the deficit and stabilize liquidity.

Market Reactions:

• Rupee depreciated to 86.53 against the dollar, impacted by global risk sentiment and US trade policy uncertainties.
• USD/INR forward premiums fell as markets adjusted to expected liquidity effects.

Bond Market Impact:

• The 10-year benchmark bond yield initially softened but rose again as state-owned banks sold bonds for profit, closing slightly higher.

Outlook:

• The RBI plans further OMO auctions worth Rs 60,000 crore to manage liquidity.
• A variable rate repo auction is also scheduled to influence market conditions in the coming weeks.