Push to corporate bond, banks! RBI to pump $5 bn equivalent long-term rupee liquidity through buy/sell swap auction
Under this move, the RBI will buy up to $5 billion from the market via auction on 26th March, and simultaneously sell it back to the same counterparties effective March 2022.
In a bid to inject liquidity, the Reserve Bank of India on March 13th announced that it will conduct a US dollar-Indian rupee Buy-Sell swap auction of $5 billion for the period of 3 years on March 26. Industry insiders say the move would pump foreign investment into the Indian bonds as the RBI has incentivised them through this initiative. However, it will have a direct hit on the bulls busy buying rupee against dollar in the Forex market. Under this, the RBI will buy up to $5 billion from the market via auction on 26th March and simultaneously sell it back to the same counterparties effective March 2022.
Speaking on the matter Suyash Choudhary, Head – Fixed Income at IDFC AMC told Zee Business online, "Given the novelty of the tool and the unexpected announcement, market interpretation of this is still fluid. The first movers are a fall in USD-INR forward premium and a reasonable rally in front end corporate bonds. A lower hedge cost should incrementally incentivize offshore flow into Indian ‘carry’ assets (corporate bonds chiefly). The imponderable still is whether the system will be able to tender the whole $5 billion in the current auction."
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Suyash went on to add that an underlying context, however, is the recent revival in dollar flows from portfolio investors also augmented by hopes of one time purchases under the domestic stressed asset resolution process. Also, once the tool is introduced, it is quite likely that the RBI follows this up with further such auctions. If so, then cost of hedge may remain better anchored for the longer term thus making rupee assets that much more attractive. A first reaction of the move also is that the new tool implies that many fewer OMOs. This means that the steepening tendency of the yield curve that has been in play for most of this calendar year persists for now.
Standing in sync with IDFC AMC views; Anindya Banerjee, Analyst at Kotak Securities said, "Through this move, the RBI has incentivised the foreign investors and they might get tempted to invest into the corporate bonds in India. However, the move will have a hit on the people further looking towards rupee consolidation into the Forex market." He suggested forex traders carve themselves away from the buying rupee on dips against the US dollar into the Forex market.
Commenting on the impact of the move on banking sector Suyash Choudhary of IDFC AMC said, "From a more medium-term perspective, this may also imply that the RBI is stepping up efforts for transmission. This move, although unconnected, comes close on the heels of the country’s largest public sector bank linking its rates on savings deposits and on cash credit lines to the repo rate. That move has also been hailed as a significant step in the direction of ensuring better transmission of monetary policy. If RBI has indeed stepped up efforts in this direction, it is very consistent with our expectations from the new Governor."
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