RBI's USD/INR Buy-Sell Swaps and Their Impact
The Reserve Bank of India (RBI) has been conducting USD/INR buy-sell swaps to inject durable liquidity into the banking system, which has led to several significant economic changes.
Key Effects of RBI's Buy-Sell Strategy
- Decline in Forward Premia: The forward premia on USD/INR contracts has declined, reducing hedging costs for Indian corporates borrowing from overseas.
- Encouragement for Overseas Borrowing: Lower swap costs incentivize Indian corporates to raise funds abroad, increasing capital inflows and bolstering India's foreign exchange reserves.
- Forex Reserves Boost: The strategy helps strengthen India's forex reserves, which have been under pressure due to RBI's interventions in the forex market to curb rupee volatility.
Statistics and Measures
- The dollar-rupee 1-year forward premium decreased to 2.13% from 2.71% earlier in the year.
- RBI has conducted $15 billion in swaps and announced another $10 billion, aiming to extend maturities in the forward book.
- RBI's net short positions in the forward book stand at $77.5 billion, with a significant portion maturing within three months.
- During April-December 2024, the share of effectively hedged external commercial borrowing increased to 78.1% from 61.6% from the previous year.
Corporate Borrowing & Market Dynamics
- Non-banking financial companies (NBFCs) are increasingly seeking overseas funding, partly due to higher risk weights on bank lending to NBFCs.
- Examples:
- IIFL Finance raised $325 million through international bonds.
- Tata Capital raised $400 million through its maiden international bond issuance.