“Interest rates on deposits have been moving up for some time now. The liquidity is in short supply in March,” confirmed Dinabandhu Mohapatra, managing director and CEO of Bank of India.
However, market participants are divided on the success of the swap auction, considering that banks may not have that much of ready money available.
“The move has addressed the need for a new liquidity management tool and is a welcome step. It is also short-sighted to worry about lack of OMO support at the end of March when the RBI clearly has done so much of OMOs already,” said A Prasanna, head, research, ICICI Securities Primary Dealership Ltd.
Prasanna said it didn’t matter if March 26 auction succeeds fully or not, as it is intended to meet multiple objectives.
Bankers say the major beneficiaries of this auction could be foreign banks, but public sector banks that need liquidity support the most, may not be in a comfortable position to take benefit of the scheme as they generally raise dollars to immediately deploy it, said a currency dealer.
However, there is another issue.
“It all depends upon how the auction cut-off comes. Say if the auction cut-off comes at 7 per cent (forward premium), against the market rate of 9 per cent (for three-year forwards), then banks are getting rupee liquidity at 7 per cent interest rate, which then can be deployed for 8.5 per cent coupons in corporate bonds,” said Ananth Narayan G, associate professor, SP Jain Institute of Management and Research and a market expert.
But if the cut-off comes very near to the prevailing market rate, then the auction is unlikely to succeed for the full amount.
However, the news of the auction has been positive for importers and Indian companies borrowing dollars abroad. On Thursday, one-year forward rates crashed by about 50 basis points on the news of the swap auction. The rupee closed stronger at 69.35 a dollar, from its previous close of 69.54.
“The decline in forward premia (especially at the longer tenor) will lower dollar hedging cost for importers. This also juxtaposes well with the recent relaxation in ECB limits, especially for state-owned oil companies, who have unhedged dollar exposures, and can now consider prudential hedging operations,” said Shubhada Rao, chief economist of YES Bank.
In the auction, most banks would be bidding at a significant discount to the market rate, but the way auctions work is that if even a few bids are done near market rates, the cut-off will likely be set higher and the lower bidders would be rejected.