RBI’s $5 billion dollar-rupee swap

 

Context:

  • The Reserve Bank of India (RBI) on Tuesday conducted a $ 5 billion dollar-rupee swap auction as part of its liquidity management initiative, leading to infusion of dollars and sucking out of the rupee from the financial system.
  • The central bank’s move will reduce the pressure on inflation and strengthen the rupee.

 

About:

  • The central bank said it received bids worth $13.56 billion for the sell/buy auction. It accepted 86 of these bids for $5.135 billion.
  • The cut-off premium was set at 656 paise.
  • The RBI sold $5.135 billion to banks on March 8 and simultaneously agreed to buy back the dollars at the end of the swap settlement period.
  • When the central bank sells dollars, it sucks out an equivalent amount in rupees, thus reducing the rupee liquidity in the system.
  • Dollar inflow into the market will strengthen the rupee which has already hit the 77 level against the US dollar.
  • The swap auction can be done in the reverse way also when there is shortage of liquidity in the system.
  • The RBI then buys dollars from the market and releases an equivalent amount in the rupees.

 

Consequences:

  • The RBI would have removed close to Rs 39,000 crore ($5.135 billion) at Monday’s rupee closing rate of 76.91 per dollar.
  • The major impact will be that liquidity which currently averages around Rs 7.6 lakh crore will shrink.
  • The RBI normally brings down liquidity in the system when inflation threatens to rise sharply.
  • With crude oil prices rising sharply in the wake of the Russia-Ukraine war, inflation is set to rise in the coming days.

 

Way Forward:
  • With the rupee under pressure and inflation posing a big risk to the economy, the central bank is expected to come out with more such measures to rein in inflation and prevent a big slide in the rupee.
  • The market is also gearing up for more RBI actions in the near future. 

 

       Source The Hindu

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