The Reserve Bank of India’s (RBI) decision to inject liquidity into the banking system daily via variable rate repo (VRR) auctions has led to a decline in dollar–rupee forward premiums, bankers said Thursday. The move reduces the need for the central bank to rely on dollar-rupee buy/sell swaps, easing pressure on the forward market.
Key Context and Importance
Forward premiums are a critical metric for companies managing foreign exchange risks. Near-maturity premiums also influence speculative trading in the dollar-rupee pair. By introducing rupee liquidity directly into the banking system, the RBI diminishes the need for buy/sell swaps in the forward market, resulting in lower forward premiums.
Traditionally, the RBI has used these swaps to counter the domestic liquidity impact of its dollar-selling interventions. However, the VRR auctions announced on Wednesday provide an alternative method for managing liquidity, reducing reliance on swaps.
Market Impact
The 1-year dollar-rupee implied yield dropped 3 basis points to 2.40%, marking a two-week low.
The 1-month forward premium declined to 21 paisa, compared to 23 paisa in the previous session.
Liquidity Conditions
As of January 15, rupee liquidity in the banking system showed a deficit of ₹2.2 trillion ($25.43 billion), down slightly from the seven-month high of ₹2.5 trillion earlier in the week. The RBI’s daily auctions aim to alleviate this liquidity crunch, stabilizing short-term market rates.
Looking Ahead
The central bank’s strategy to directly inject rupee liquidity is expected to keep forward premiums subdued, providing relief to corporate treasury managers and dampening speculative pressures in the forex market. Traders will closely monitor further RBI actions to assess their impact on long-term forex and liquidity trends.
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