Indian rupee rally, lower hedging costs to spur corporate interest in central bank's FX swap
On Wednesday, the RBI will absorb $10 billion from the market and inject an equivalent amount of rupees in the banking system, with the reversal set to take place after three years. Bidding for the swap will be held on Monday.
The RBI conducted a swap of a similar size and duration late last month. These swaps are part of the central bank's efforts over the last two months to boost rupee liquidity in the banking system amid slowing economic growth.
At the time, the rupee was at 87.30/87.40 against the U.S. dollar and the three-year hedging cost, or long-term forward points, was at 6.70/6.90 rupees.
The rupee has rallied since then, hitting a two-month high of 86.20 this week, while hedging costs have declined to 6.00/6.20 rupees, resulting in a more favourable environment for firms seeking to hedge their long-term dollar exposures and secure rupee funding.
The current rates "are quite attractive for corporates to lock into fully-hedged rupee cost, which is lower than borrowing in rupees directly," said B. Prasanna, head - treasury, at ICICI Bank.
"Apart from fresh external commercial borrowing (ECB) hedging demand, there will be demand for hedging old ones that were being hedged by rolling over short-term FX swaps."
Bankers have said that the extended window between the RBI's swap announcement and the bid submission date, compared to the previous auction, will allow corporates and asset-liability desks of banks more time to secure dollar liabilities and hedge them through the RBI auction.
A "lot of corporates" would be interested, with larger and more active corporate treasuries waiting to take advantage of the lower rate expected in the RBI auction, Prasanna said.
Ritesh Bhusari, joint general manager for Treasury at South Indian Bank, concurred, saying that the rally in the rupee and decline in forward points, "bodes well" for the participation of corporates at the swap auction.
Bankers expect a cutoff rate in the range of 5.70 to 5.90 rupees at the swap auction, a decline from the 6.55-rupee cutoff in the prior auction.
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