Dollar swap auction round-2 likely to be less aggressive

Mumbai: Currency dealers are unlikely to bid aggressively in the second dollar-swap auction on Tuesday, hurt by their experience in the last round at the end of which they were stuck with significant dollar stock. Hence, the premium that banks are willing to pay to swap their dollars into rupees is likely to be closer to the market rate. An uptick in the dollar against the rupee, rise in oil prices and a slowdown in foreign portfolio flows into India will also dissuade dealers from bidding aggressively in Tuesday’s auction.

The dollar has risen to 69.67 against the rupee from 68.42 in early April and is also higher than the 69.33 per dollar mark it had touched at the end of March. On Monday, oil topped $74 a barrel, the highest since November, after the US announced fresh sanctions on Iranian exports, tightening global supplies.

Foreign portfolio flows into the domestic equity and debt markets have fallen to Rs 14,501 crore from Rs 48,751 crore in March, which means banks do not have excess dollars to bid for this swap round.

“All factors point to a less than aggressive bidding by banks. It does not mean that the $5 billion will not be taken but it could mean that the cut-off will not be as low as in the last auction. Swap rates have also gone up and the rupee is also slightly weaker. I expect the cut-off to be closer to the three-year MIFOR,” said Ashutosh Khajuria, executive director at Federal Bank.

RBI received bids for $16.3 billion versus $5 billion in the last round. The cut-off premium, the threshold for banks to receive any allotment, was pegged at 776 paisa. In percentage terms, it was 13 basis points less than the then three-year MIFOR (Mumbai Interbank Forwards Rate). One basis point is 0.01 percentage point. Last time, many banks were left holding excess dollars on which they incurred trading losses.

“The cut-off may still be lower than the market rate but just 5-7 basis points and not 13 basis points like last time. Banks do not want to get stuck with excess dollars,” said Ashish Vaidya, head of trading at DBS Bank.