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RBI to inject liquidity via forex swaps
Why is it in the news ?
- The Reserve Bank of India (RBI) has decided to inject rupee liquidity into the system through long-term foreign exchange buy/sell swap.
- It is a first-of-its-kind instrument used for liquidity management.
More in the news
- RBI would buy as much as $5 billion from the banks in a swap deal that could inject nearly 35,000 crores into the system.
- Banks would be required to park dollar funds with RBI with a deal to buy it back from the RBI after three years.
- The auction for this US dollar buy/sell swap auction will take place on March 26.
- RBI generally use bond purchases for the same all these years. RBI has infused more than Rs 2.36 lakh crore through such purchases so far this fiscal. Auction Process:
- The swap will be a simple buy/sell trade in which banks can place bids to sell their excess dollars to the RBI in and simultaneously agree to buy the same amount at the end of the swap period.
- The auction cut-off for this swap would be based on the premium amount in paisa terms.
- Market participants will place their bids with the premium that they are willing to pay to the RBI for the tenor of the swap expressed in paisa terms.
- Successful bids will get accepted at their respective quoted premium.
Why Forex swap?
- According to bankers, the move is seen to lower the dependence on open market operations which have been a significant amount of the overall borrowing.
- Open market operations (OMO) refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system.
- Higher OMOs can distort the rates curve.
- The move would boost RBI’s foreign exchange reserves which were at $401.7 billion for the week ended March 1
Source
The Hindu, ET.