India to conduct $5 billion dollar/rupee swap as FX pain persists

BENGALURU, May 20 (Reuters) - The Reserve Bank of India said on Wednesday it will conduct a dollar/rupee buy/sell swap auction of $5 billion for a tenor of three years on May 26.The swap followed a review of current and evolving liquidity conditions, the central bank said, and comes as it continues to defend a rapidly weakening rupee by selling dollars from forex reserves.Such sales remove rupee liquidity from the country's banking system and can push up interest rates.The rupee has weakened more than 6% since the Iran war began, pushing up crude. The Indian currency has fallen to consecutive record lows, including an all-time low of 96.96 per dollar on Wednesday.The RBI has sold dollars at an estimated pace of $1 billion per day in recent sessions, Reuters reported earlier in the day, citing bankers.India's banking system liquidity remains in surplus but has fallen to 1.51 trillion rupees ($15.6 billion), which is around 0.6% of deposits.“It is quite likely that the swap is meant to address the liquidity drag on account of FX intervention. It would also help cool down the USD/INR forward premiums," said Sakshi Gupta, an economist at HDFC Bank.The swap will be good for bonds as it will help maintain surplus liquidity, said Alok Singh, head of treasury at CSB Bank."It should cool forwards, which have been rising over the past two weeks, and bring down hedging costs. The impact on the INR spot rate is likely to be neutral," Singh said.India's benchmark 6.48% 2035 bond yield dipped 3.4 basis points to end at 7.0761% on Wednesday.(Reporting by Nishit Navin in Bengaluru, Jaspreet Kalra and Khushi Malhotra in Mumbai; Editing by Janane Venkatraman and Mrigank Dhaniwala)