“There is always the potential for a central bank to engage in discretionary monetary policy and to break the one-to-one link between changes in foreign reserves and changes in the money supply.”- Steve Hanke (American Economist)
Late evening, this Wednesday, RBI announced that it would conduct a USD/INR swap auction for $5 billion. We view this as an exceptionally well-thought implementation by RBI to infuse liquidity and manage INR rates with a single move.
How does the swap work?
Eligible banks will bid a premium (an additional amount they are willing to pay RBI) to avail the opportunity to exchange their US Dollar reserve for a Rupee equivalent from RBI. This swap allows the bank to utilise the INR for banking activities and are expected to return this INR amount to RBI along with the committed premium at the end of three years to get their USD reserves back.
How does this help India?
While the benefits are multi-faceted, here are the two key impacts of such an action:
What should a fixed-income investor do?
While we have been expecting a rate cut since some time now, this swap auction along with significant bond buyback by RBI (~ INR 2.8 lakh crore) this fiscal year eliminates the need for a rate cut to a good extent. But, the fresh spurt in liquidity may bring along some demand-led softening of yields.
Short to medium term papers with AAA/sovereign-rated quality seem to be the sweet spot right now. It is still advisable to stay away from longer maturity debt funds.
While RBI made an unprecedented announcement, the week also witnessed strong resilience by Indian equities:
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If you have any concern, please write to us at ask@fisdom.com or call at 080 48039999, we would be happy to answer your query.
Thanks,
Nirav (Head of Research)
Fisdom
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