How India's RBI could tackle a liquidity deluge triggered by dollar deposits
MUMBAI: The Reserve Bank of India’s special dollar deposit scheme drew a larger-than-expected $127.23 billion, leaving the central bank having to deal with a problem of plenty. The dollar deposits, swapped by banks directly with the RBI, have pushed the liquidity surplus in India’s banking system to a record high of 9.70 trillion rupees ($102.70 billion). Traders are debating how the central bank may absorb these funds, as allowing them to slosh around could fan already-rising inflation. Longer-term variable rate reverse repos The central bank routinely conducts overnight to seven-day variable rate reverse repo (VRRR) auctions to suck out liquidity. Typically these operations lock up liquidity for a few days. RBI back to rupee’s rescue to counter oil, Fed headwinds; steps into swaps too But the central bank could conduct longer-term VRRRs while giving banks the option to reverse them early, traders said. “Repos conducted in this format saw reasonable success at the start of the calendar year, so it could offer a win-win solution for all parties,” according to a trader at a primary dealership. FX swaps The central bank could also use shorter tenor dollar-rupee sell-buy swaps. By sel
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How India's RBI could tackle a liquidity deluge triggered by dollar deposits
MUMBAI: The Reserve Bank of India’s special dollar deposit scheme drew a larger-than-expected $127.23 billion, leaving the central bank having to deal with a problem of plenty. The dollar deposits, swapped by banks directly with the RBI, have pushed the liquidity surplus in India’s banking system to a record high of 9.70 trillion rupees ($102.70 billion). Traders are debating how the central bank may absorb these funds, as allowing them to slosh around could fan already-rising inflation. Longer-term variable rate reverse repos The central bank routinely conducts overnight to seven-day variable rate reverse repo (VRRR) auctions to suck out liquidity. Typically these operations lock up liquidity for a few days. RBI back to rupee’s rescue to counter oil, Fed headwinds; steps into swaps too But the central bank could conduct longer-term VRRRs while giving banks the option to reverse them early, traders said. “Repos conducted in this format saw reasonable success at the start of the calendar year, so it could offer a win-win solution for all parties,” according to a trader at a primary dealership. FX swaps The central bank could also use shorter tenor dollar-rupee sell-buy swaps. By sel
