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
