Indian banks pitch FX sell/buy swaps to drain surplus liquidity, sources say
Indian lenders suggested forex sell/buy swaps to reduce excess rupee liquidity. This proposal came after a meeting with the Reserve Bank of India. Banking system liquidity reached a record high following foreign currency deposits. The central bank has several tools to manage liquidity effectively. Lenders urged the RBI to avoid impacting bank margins with other measures.
Indian banks have proposed using foreign exchange sell/buy swaps to gradually remove excess rupee liquidity from the banking system, according to sources familiar with a meeting with the central bank. Liquidity in the banking system grew to a record 9.7 trillion rupees after India received $127 billion in foreign-currency deposits from non-residents, which were swapped directly with the Reserve Bank of India.
The Reserve Bank of India has several tools to control liquidity, including forex swaps, bond sales, and increasing the cash reserve ratio. Banking executives favored forex swaps during the meeting, as that would remove rupee liquidity without affecting other asset classes. The RBI could conduct sell/buy swaps for up to a one-year tenor to match the maturities of its short dollar positions in the forward book, effectively bringing those maturities forward.
However, lenders urged the central bank not to adjust banks' cash reserve ratios, as that could impact bank margins.
Written by urgent.news from The Economic Times - Economy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
