RBI’s $5 Billion Swap Maturity Sparks Dollar Shortage Concerns

RBI August 2023

October 17, 2023

New Delhi, India


The financial markets in India are abuzz with concerns over a looming dollar shortage as the Reserve Bank of India (RBI) approaches the maturity of a significant $5 billion USD/INR swap transaction. This news report delves into the key factors contributing to these concerns and the potential implications for India’s currency market.

Dollar Shortage Fears:

Forex traders and financial experts are expressing heightened apprehension regarding the availability of US dollars in India’s banking system. These concerns are linked to the imminent maturity of an RBI dollar/rupee swap transaction, set to take place in the coming week.

Previous RBI Swap Transaction:

In the previous year, the RBI executed a $5 billion sell/buy dollar/rupee swap, where the central bank sold $5 billion to banks on April 28, 2022. The maturity date for this transaction is October 23, 2023.

The Fear of Non-Rollover:

One of the prevailing fears among market participants is that the RBI may opt to take physical delivery of the dollars at maturity instead of rolling over the swap. Such a move could result in the withdrawal of a substantial $5 billion from India’s banking system, potentially aggravating the dollar shortage.

Market Reactions and Forward Premiums:

In anticipation of a potential dollar shortage, banks are proactively engaging in buy/sell swaps and receiving premiums for near-term deliveries. Buy/sell swaps involve the purchase of dollars on the spot date and selling them at a later date. The spread between purchase and sale rates is referred to as the forward premium. These forward premiums are indicative of interest rate differentials between currencies and can affect hedging costs for importers and exporters.

State-Run Bank Involvement and Market Impact:

Furthermore, a significant state-run bank has been actively participating in buy/sell swaps, offering a substantial $1 billion swap in October through the interbank order matching system. This involvement underscores the widespread concern over the potential dollar supply shortage.

Rupee Depreciation and Market Indicators:

As the market grapples with these concerns, the Indian rupee ended at a record closing low of 83.28 against the US dollar, reflecting a 2 paise depreciation compared to the previous day. The dollar/rupee cash swap rate also declined, indicating early signs of a potential dollar crunch.

Future Implications:

The RBI’s decision regarding the swap transaction has significant ramifications, potentially affecting the availability of US dollars and the stability of the Indian rupee. Market participants will be closely monitoring developments as the maturity date approaches.

In conclusion, the looming maturity of the RBI’s $5 billion USD/INR swap has cast a shadow of uncertainty over India’s financial markets, with fears of a dollar shortage dominating the current landscape. Market players are adopting proactive measures to navigate these concerns, and the central bank’s upcoming decision will be pivotal in determining the fate of the Indian currency.