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The maturity of the Reserve Bank of India’s (RBI) $5 billion swap has led to an increased demand for cash dollars and a significant drop in the overnight swap rate. The swap, initiated in April 2022, was designed to provide dollar liquidity to banks, a measure now being phased out, obliging participating institutions to return these dollars potentially through the overnight swap market.

On Monday, the swap rate fell to 0.14 paisa, a decrease from Friday’s 0.17 paisa. This decline reflects a more substantial shift in the imputed rupee interest rate, which now stands at 5.60%, significantly lower than the 6.60% overnight rupee call rate. This shift indicates that banks are prepared to lend rupees at cheaper rates to secure dollars due to an emerging shortage.

Ritesh Bhusari from South Indian Bank anticipates this dollar shortage will be short-lived but cautions that escalating global dollar shortages and increasing geopolitical risks could necessitate intervention from the RBI. Despite these changes, the forex markets have not been notably affected by the maturity of the swap or the consequent rise in cash dollar demand.

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