The Reserve Bank of India (RBI) on March 26 injected Rs 34,561 crore liquidity through its maiden long-term dollar-rupee swap auction. A better-than-expected market response signalled more such auctions in future.

“The response was higher than anticipated. This clears the deck for more such money market operations going ahead,” said Ashish Vaidya, Head of Trading, DBS Bank.

The RBI received 240 bids worth $16.31 billion at an average premium of Rs 7.92. The central bank accepted 89 offers totalling $5.02 billion at a cut-off premium of Rs 7.76. These premiums represent what banks are willing to pay to the central bank at the end of the swap tenor, which is fixed at three years.

The RBI had aimed to infuse around Rs 35,000 crore into the system through this new liquidity management tool. “Markets were expecting cut off premium between Rs 7.60 to Rs 7.80, so it is in line with market expectations,” said Ashutosh Khajuria, Chief Financial Officer, Federal Bank.

Liquidity deficit in the banking system had widened during the week ended March 22. Year-end demand for funds by businesses, high currency in circulation and fresh government borrowings pushed the average liquidity deficit to a three-week high of Rs 75,653 crore.

“The banking system liquidity deficit would continue to be pressured in the current week with increased outflows towards tax payments (GST) and year-end payment requirements of businesses,” Madan Sabnavis, Chief Economist at CARE Ratings said in a note. “The high levels of currency in circulation would also add to the liquidity constraints.”

Going ahead, traders expect the RBI to use the swaps along with its regular open market purchase of government bonds to provide liquidity to the system. However, swap issuances only provide temporary relief as they need to be reversed at the end of the tenor.

“Banks will have to mop up Rs 35,000 to Rs 36,000 in March 2022 to buy back these dollars at the premium determined in the auction. This could be a challenge for banks as liquidity is typically tight in March each year,” said Khajuria. “The central bank will probably come up with a similar auction or use another liquidity tool to ease out the pressure.”

Before the auction, RBI Governor Shaktikanta Das met with several bankers to gauge the appetite for the swaps. On March 19, Das had said the central bank’s announcement to conduct such an auction had been received “quite well.”

The rupee appreciated 10 paise to end at 68.86 against the US dollar in trade today on the robust response to the swap auction.