LIQUIDITY MANAGEMENT INITIATIVE

LIQUIDITY MANAGEMENT INITIATIVE

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March 11, 2022 - 11:32 am

RBI Conducts $5 billion Dollar-rupee swap


    The Reserve Bank of India (RBI) 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. 

      Dollar–Rupee Swap is a forex tool whereby the central bank uses its currency to buy another currency or vice versa. In a Dollar–Rupee buy/sell swap, the central bank buys dollars (US dollars or USD) from banks in exchange for Indian Rupees (INR) and immediately gets into an opposite deal with banks promising to sell dollars at a later date. Central Banks engage in it because Forex swaps help in liquidity management. It also, in a limited way, helps in keeping the currency rates in check. A dollar–rupee buy/sell swap injects INR into the banking system while sucking out the dollars, and the reverse happens in a sell/buy swap. 

     The RBI’s planned forex swap auction went through smoothly. 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 first leg of the settlement will be March 10, 2022 and the second leg will be March 11, 2024. 

        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. Further, foreign portfolio investors have been pulling out funds from India. They have withdrawn Rs 34,000 crore from Indian stocks in March so far, putting severe pressure on the rupee. After the swap auction on Tuesday, the rupee recovered to 76.92 from 76.97 on Monday. 

     Usually, the central bank will resort to traditional tools such as increasing the repo rate or increasing the cash reserve ratio (CRR), but this can have a negative implication on the economy. Therefore, the RBI used a different toolkit - variable rate reverse repo auction (VRRR) last year. However, the recent VRRR auctions were undersubscribed by banks, as the cash market offered instant and better yields, forcing the RBI to consider a longer-term liquidity adjustment tool such as forex auctions.  

     Market watchers observed that the swap gave companies an opportunity to purchase dollars at affordable cost to be able to service their foreign currency loans. They can also repatriate the dollars for any overseas projects. 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.


Questions and Answers Questions and Answers

Question : What did the Reserve Bank of India RBI conduct as part of its liquidity management initiative?
Answers : 5 billion dollar-rupee swap
Question : What will reduce the pressure on inflation and strengthen the rupee?
Answers : RBI's planned forex swap auction
Question : What is a forex tool where the central bank uses its currency to buy another currency?
Answers : Dollar Rupee Swap
Question : What is a forex tool where the central bank buys dollars from banks in exchange for Indian Rupees INR?
Answers : Dollar-Rupee buy sell swap
Question : What helps in liquidity management?
Answers : Forex swaps
Question : What does Dollar-Rupee Swap help in?
Answers : Keeping the currency rates in check
Question : What injects INR into the banking system while sucking out the dollars?
Answers : A dollar-rupee buy-sell swap
Question : What did the Reserve Bank of India conduct?
Answers : RBI's planned forex swap auction
Question : How much did the RBI receive bids for the sell buy auction?
Answers : $13.56 billion
Question : How many bids did the RBI accept for the sell buy auction?
Answers : 86
Question : What was the cutoff premium for the dollarrupee swap auction?
Answers : 656 paise
Question : When will the second leg of the settlement begin?
Answers : March 11, 2024
Question : How much did the RBI remove at Monday's rupee closing rate of 76.91 per dollar?
Answers : Rs 39,000 crore ( $5.135 billion)
Question : How much is the liquidity expected to shrink?
Answers : Rs. 7.6 lakh crore
Question : Why does the RBI normally bring down liquidity in the system?
Answers : To control Inflation
Question : Who has been pulling out funds from India recently ?
Answers : Foreign portfolio investors
Question : What did foreign portfolio investors withdraw from Indian stocks in March ?
Answers : Rs 34,000 crore
Question : What was the rupee recovered after the swap auction?
Answers : Rs. 76.92
Question : What are traditional tools used by the central bank?
Answers : Increasing the repo rate or increasing the cash reserve ratio CRR
Question : What toolkit was undersubscribed by banks?
Answers : VRRR
Question : What did the RBI consider a longer term liquidity adjustment tool?
Answers : Forex auctions
Question : What did market watchers observe gave companies the opportunity to purchase dollars at affordable cost to be able to service their foreign currency loans?
Answers : Exchange
Question : What do market watchers say the swap gave companies an opportunity to purchase dollars at affordable cost to be able to service their foreign currency loans?
Answers : Repatriate the dollars for any overseas projects
Question : Who is expected to come out with more measures to rein in inflation and prevent a big slide in the rupee?
Answers : The central bank
Question : What is the market gearing up for in the near future?
Answers : More RBI actions
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