The Reserve Bank of India (RBI) reportedly did not roll over the US Dollar (USD) 5 billion sell/buy swap it conducted on March 8, 2022, in a bid to augment Rupee liquidity in the banking systemn ahead of direct tax and goods & service tax (GST) outflows.

The RBI had conducted the aforementioned 2-year sell/buy swap to enhance Dollar liquidity in the market.

A sell/buy foreign exchange swap entails a bank buying US Dollars from RBI and simultaneously agreeing to sell the same amount of US Dollars at the end of the swap period.

With the RBI not rolling over the swap, banks will get Rupee liquidity and RBI will get Dollar liquidity.

Advance tax, GST outflows

Gopal Tripathi, Head - Treasury and Capital Markets, Jana Small Finance Bank, said from March 15- 20, the banking system will see outflows aggregating about ₹3.7-lakh crore on account of direct tax and GST payments. So, to address the liquidity deficit in the banking system due to the outflows, RBI may not have rolled over the sell/buy USD swap.

Tripathi assessed that liquidity amounting to about ₹40,000 crore could accrue to the banking system on account of RBI taking delivery of the swap. Also, the forex reserves will get bolstered by an equivalent amount in Dollar terms.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said the banking system will be staring at a huge liquidity deficit towards the middle of this month due to tax (advance tax + GST) outflows. By not rolling over the swap, the RBI is trying to alleviate the liquidity crunch.

The RBI had conducted the 2-year $5 billion sell/buy swap on March 8, 2022. The central bank then received bids from particpants for drawing funds amounting to $13.565 billion and allocated $5.135 billion.

The first and second leg settlement date of the swap were March 10, 2022 and March 11, 2024.

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