India: RBI implemented $5bn USDINR buy/sell swap auction - TDS

TD Securities analysts note that in India, the RBI has implemented a $5bn USDINR buy/sell swap auction yesterday to inject “durable” INR liquidity into the system.

Key Quotes

“This is an alternative to OMOs to offset the increase in FX liquidity in the system, especially given some large and chunky USD inflows. OMOs have been significant and have absorbed a huge chunk of government bond supply since Sep 18, reducing net government bond supply. There are a few consequences to note.”

“The swaps will likely help reduced FX implied rates, fuelling convergence to OIS. In turn, this will help attract foreign inflows in the wake of reduced hedging costs while making it cheaper for corporates to raise USD funding.”

“While the swaps will likely reduce government bond demand from RBI we don’t think this will translate into renewed bond market pressure. High real rates, stable FX, low inflation, potential for more rate cuts, benign Fed path, all bode well for bonds.”