From 26th March 2019, Mint Street will be operating through both currency and money market instruments, with a newly emerged tool known as SWAP AUCTION which is the first of its kind.
- Apart from filling cash into the banking system, this will have multiple layered effects.
- Lower the cost of currency/interest rate risk covers would provide a way of getting foreign capital and also rationalize bond yields which would otherwise be in sync with monetary policy activities.
- RBI would be infusing USD 5 billion or Rs. 35,000 crores through this Swap program, instead of purchasing bonds and this would affect their yields otherwise.
- It is expected that this move would help when the financial year-end is fast approaching when banks are running short of money.
- It is felt that it is a novel tool which is expected to bring both forex and currency markets in sync.
- If all operational channels are in alignment, this should become an effect way of managing market liquidity.
The new swap system will work as under:
- RBI will buy dollars instead of bonds from the banks
- Dollars will emanate from the bank either for their own positions or for their clients
- Bidding position for the proposed auctions would be around 15 BPS less than the current market rate (Mumbai Interbank forward offer rate)
- Banks are expected to bid at rates lower than those implied by current market rates.
- This in turn will make Indian Rupee costlier than the current three-year funding rates.
- Lower MIFOR means, hedging costs would come down which in turn would make investments in Corporate bonds more attractive.
- MIFOR is the cost of hedging dollar payables, which is priced over and above the spot exchange rate.
- The interest rate differential between India and US which his prevalent now influences the benchmark device.
- Such MIFOR rate of 3-year maturity is now at about 4.21% annualized and the 12-month MIFOR rate dipped about 44 bps when RBI announced the auction.
- Foreign investors looking at fully hedged returns would be encouraged while investing in India.
- The cost of one-year money for any US-based overseas investor who bets on India is now about 6.20% which includes hedging costs.
- India offers 7.71% average yield for one year, top-rated corporate bonds and thus there is a healthy rate differential of 151 basis points.
- Also, Forward premium has fallen after RBI swap announcement.
- One more fact is that when rupee is trending stronger against dollar, swap auction which his multi-faceted, is said to be a perfect measure, suiting the current requirement.
- Dealers feel that RBI’s present move is in line with its easy monetary policy stand and has resulted in a better transmission to the real economy.