RBI announces a Dollar-Rupee swap window to address looming liquidity crunch

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To address the on going liquidity tightness in the financial and banking system, ahead of the ending fiscal year and the upcoming General Election 2019 the Reserve Bank of India (RBI) has announced a foreign exchange swap auction or Dollar-Rupee swap to render durable liquidity in the market.

Though the central bank has been regularly infusing money into the banking system using Other Market Operation (OPO) since the IL&FS default last year, but it has now announced  a swap window as the liquidity situation is expected to worsen in the next couple of weeks on advance tax and GST filing and increased spending on elections. This prompted the RBI to take the measure ahead of any liquidity crises so it announced the swap window.

The aforementioned swap transaction is scheduled for 26 March but only banks will be able to deposit US dollars for the exchange of Rupees. The swap transaction also involves an agreement using which banks could reverse the transaction at a fixed exchange rate at the end of three years.

If the announced swap transaction successfully completes then this will render $5 billion worth of Indian Rupees in the Indian banking system which is likely to ease the liquidity situation. Also, apart from this the swap will also hike the RBI’s foreign exchange reserve by $5 billion dollars.

Banks which are currently short on SLR securities and cannot participate in OMOs, will receive liquidity infusions too. The central bank had last year used foreign currency swaps to attract dollar FCNR deposits from NRIs and prop up the rupee during the taper tantrum months of 2013. In 2013 RBI used swap window to improve its foreign exchange reserve and help the depreciating rupee against US dollar. But, this swap will not have similar effects as the dollars can be domestically sourced.

The move opening a swap window to address the liquidity crises is a welcome move and reflects that central bank has taken cognizance of looming liquidity crises.

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