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How market likely to gain from RBI liquidity measure

“It is a proactive move to manage liquidity,” said Asish Vaidya, head of markets for India at Singapore's DBS.

, ET Bureau|
Mar 14, 2019, 11.52 PM IST
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Indiatimes
markets
Earlier, the central bank was actively seen buying dollars whenever the rupee gained significantly against the US currency.
Mumbai: The swap facility that the Reserve Bank of India has offered to address cash shortages at banks at the fiscal year-end will benefit both foreign exchange and money markets.

It will compress arbitrage trades in the forwards markets, while the central bank will have a relatively easy task in shoring up its dollar reserves, which is vital to fight any global economic crisis.

“It is a proactive move to manage liquidity,” said Asish Vaidya, head of markets for India at Singapore's DBS.

“This is a new way to infuse liquidity into the system instead of traditional G-sec buys via OMOs (open market operations),” he said. “With this, arbitrage between forex and money market will surely compress, making markets more orderly.”

The differential or spread between MIFOR (Mumbai Interbank Offered Rate, which depicts forwards rate in the forex market) and two-year OIS (Overseas Interest Rate), a gauge that portrays the same in the money market, has been in the range of 70-83 basis points in past one-two weeks, compared with 25-30 bps normally. Such disparity destroys market dynamics fanning speculative bets, dealers said.

Traders tend to make large bets if the differential is wide.

“While in short term bond yields are likely to fall, long-term yields may rise due to the latest RBI liquidity measure,” said Anindya Banerjee, an analyst at Kotak Securities. “The absence open-market purchase operations will cut supply of long-maturity bonds, but the cash availability in the system should push down shorter-maturity rates.”

The central bank would also not feel the urge to shore up forex reserves as the move will automatically add up to the dollar stock, he said.

Earlier, the central bank was actively seen buying dollars whenever the rupee gained significantly against the US currency.

The one-year treasury bill fell three basis points Thursday while the 10-year benchmark yield rose three basis points before closing at 7.36%.

On Wednesday, the RBI offered a $5-billion swap facility to banks to help manage cash shortages in the banking system just ahead of financial year closure.

In order to meet the durable liquidity needs of the system, the RBI has decided to augment its liquidity management toolkit and inject rupee liquidity for longer duration through long-term foreign exchange buy/sell swap, the bank said.

The auction will happen on March 26 and the buy/sell swap will run up to March 28, 2022, or for a three-year duration.

Under this, a bank can sell US dollars to the Reserve Bank and simultaneously agree to buy the same amount of US dollars at the end of the swap period.
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