Finnovation- Rupee-Dollar Swap
In the
aftermath of the liquidity crisis in the non-banking financial sector, it can
be an effective way to lower private borrowing costs as well.
BY DEVANSHI JAIN | 2 min read
The
Liquidity Adjustment Facility (LAF) that contains the repo, reverse repo and
term repo is the king of the RBI’s liquidity operation tools. Liquidity
management is a daily exercise of RBI. RBI uses liquidity management for the
injection and absorption of liquidity in the economy.
Rupee-Dollar
Swap is a useful addition to the RBI’s policy toolkit as it offers the central
bank a chance to directly influence both the value of the rupee and the amount
of liquidity in the economy at the same time using a single tool.
The
Rupee-Dollar Swap may be either to sell dollars to banks or to sell rupee to
banks. When the RBI sells dollars to banks, it will get rupee in return. On the
other hand, when the RBI sells Indian Rupee, it can get US Dollars from
banks in exchange.
The
Rupee-Dollar Swap can be in two forms:
(1) US
Dollar/Rupee –Sell/Buy Swap: Here injection of US Dollar into the economy as
the RBI sells US Dollars by receiving Rupee from participating banks.
(2) US
Dollar/Rupee –Buy/Sell Swap: Here the RBI injects Rupee into banks by selling
rupee while receiving US Dollars from the participating banks.
In the news
RBI will
provide $2 billion on March 23, 2020 to the banks that need it through a swap.
The central bank will give dollars and the buyer will give rupees and the
transaction will be reversed on September 25. It is a 6-month sell-buy swap
from RBI. This is the second time RBI has come out with the dollar-swap window
this month. RBI, in this case, is trying to replenish the dollars in the
market. Banks have witnessed huge outflows of dollars as foreign institutional
investors (FIIs) sell their shares.