The Reserve Bank of India (RBI) has decided to inject rupee liquidity into the system through long-term foreign exchange buy/sell swap — a first-of-its-kind instrument used for liquidity management.
Recent decision:
The RBI would conduct dollar-rupee buy/sell swap auction of $5 billion for a three-year tenor on March 26.
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.
Banks would be required to park dollar funds with RBI with a deal to buy it back from the RBI after three years.
Benefits:
This has been done in order to meet the durable liquidity needs of the system and to inject rupee liquidity for longer duration.
The U.S. dollar amount mobilised through this auction would also reflect in RBI’s foreign exchange reserves for the tenor of the swap while also reflecting in RBI’s forward liabilities.
Comment:
RBI has been an active participant in the dollar/rupee swap market but this is the first time the central bank has announced an auction.
The move is seen to lower the dependence on open market operations (OMOs) which have been a significant amount of the overall borrowing.
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