MUMBAI, May 26 (Reuters) - The Reserve Bank of India's three-year dollar/rupee buy-sell swap drew strong demand on Tuesday, with the auction receiving bids of nearly $10 billion, almost twice the size of the auction.
The central bank accepted 141 bids at the FX swap auction, with the premium cut-off set at 9.10 rupees. It had received a total of 254 bids worth $9.8 billion.
The swap comes at a time when the central bank continues to defend a rapidly weakening rupee by selling dollars from forex reserves. Such a move can remove rupee liquidity from the country's banking system and can push up interest rates.
Through the settlement of the initial leg of the swap, scheduled for Friday, the Reserve Bank of India will inject rupee liquidity back into the banking system. The swap will be reversed three years later.
India's banking system liquidity surplus has averaged below 2 trillion rupees ($20.93 billion) so far in May, which is less than 0.8% of deposits.
The Indian currency has fallen to consecutive record lows, including an all-time low of 96.96 per dollar last week. It recovered to about 95.50 on the back of central bank interventions and a retreat in oil prices.
Meanwhile, the bond yield curve flattened as short-term rates priced in rate hikes, perhaps as soon as in June, while long-term rates were yet to reflect these expectations.
Far tenor dollar-rupee forward premiums fell after the auction results were announced. The three-year forward premium last stood at 9 rupees, down from about 9.25 rupees before the results.
($1 = 95.5600 Indian rupees)
Reporting by Jaspreet Kalra; Editing by Janane Venkatraman
Source: Reuters