The Maturity of RBI’s $5 Billion Swap Increases Demand for Cash Dollars
Increased Demand for Cash Dollars
The Reserve Bank of India’s (RBI) $5 billion swap has reached maturity, leading to a surge in demand for cash dollars. This has resulted in a significant drop in the overnight swap rate and has implications for the rupee interest rate. The swap, which was initiated in April 2022, aimed to provide dollar liquidity to banks. However, as the measure is now being phased out, participating institutions are required to return these dollars, potentially through the overnight swap market.
Decline in Swap Rate
On Monday, the swap rate fell to 0.14 paisa, a decrease from Friday’s 0.17 paisa. This decline reflects a more substantial shift in the imputed rupee interest rate, which now stands at 5.60%. This rate is significantly lower than the 6.60% overnight rupee call rate. The shift indicates that banks are willing to lend rupees at cheaper rates to secure dollars due to an emerging shortage.
Short-Lived Dollar Shortage
Ritesh Bhusari from South Indian Bank predicts that the dollar shortage will be short-lived. However, he cautions that escalating global dollar shortages and increasing geopolitical risks may necessitate intervention from the RBI. Despite these changes, the forex markets have not been notably affected by the maturity of the swap or the consequent rise in cash dollar demand.
Conclusion
The maturity of RBI’s $5 billion swap has led to an increased demand for cash dollars and a significant drop in the overnight swap rate. This shift in the imputed rupee interest rate indicates that banks are prepared to lend rupees at cheaper rates to secure dollars due to an emerging shortage. However, experts believe that this shortage will be short-lived. It remains to be seen how the RBI will address the escalating global dollar shortages and increasing geopolitical risks. Despite these challenges, the forex markets have not witnessed significant disruptions. The impact of the swap maturity on the cash dollar demand emphasizes the dynamic nature of the global financial landscape.
