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RBI May Roll Over $5-Billion Foreign Exchange Swap Due to Inflation Concerns

Strategic Insights

— 1 min read

As the Reserve Bank of India (RBI) considers rolling over a $5-billion foreign exchange swap set to mature next week, it prioritizes liquidity management over bolstering forex reserves due to inflation concerns. The central bank, which has repeatedly flagged inflationary risks stemming from excess funds with banks, is likely to let the swap mature, potentially leading to an inflow of around `40,000 crore in the banking system. However, others believe the RBI may roll over the swap to avoid premature rate easing expectations and maintain control over liquidity.

Key Takeaways:

  • The RBI is considering rolling over a $5-billion foreign exchange swap set to mature next week, prioritizing liquidity management over bolstering forex reserves due to inflation concerns.
  • The central bank has repeatedly flagged inflationary risks stemming from excess funds with banks, and core liquidity remains at a large surplus of `3 trillion.
  • Vivek Kumar, economist at Quanteco Research, suggests that the RBI may roll over the swap to avoid premature rate easing expectations and maintain control over liquidity.
  • Core liquidity accounts for the government's cash balances, which cyclically flow in and out of the banking system.
  • The RBI may let the foreign exchange reserves drop to $584.74 billion due to revaluation in the face of a strong US dollar and dollar sales aimed at shielding the rupee.
  • Annualised dollar-rupee forward premium rates have fallen 10 bps over the past week as lenders have undertaken 'buysell' swaps, which entail selling dollars at a future date.

Statistics:

  • The RBI's core liquidity surplus is approximately `3 trillion.
  • The central bank has infused large amounts of cash, resulting in a massive surplus of around `5 trillion in headline liquidity in April 2022.
  • The RBI's headline foreign exchange reserves have dropped $10.12 billion to $584.74 billion from August 24 to October 6.
  • Annualised dollar-rupee forward premium rates have fallen 10 bps over the past week.
  • The RBI may allow the foreign exchange swap to mature, potentially leading to an inflow of around `40,000 crore in the banking system.

Sources:

  • Vivek Kumar, economist at Quanteco Research
  • Reserve Bank of India (RBI)
  • [Source 2]

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