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Economy
Mahesh

11/03/22 15:13 PM IST

RBI’s $5 billion dollar-rupee swap

In News 
  • 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.
About Dollar-Rupee Swap Action 
  • It’s 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.
Impact of Swap 

  • Forex swaps are intended for liquidity management. Therefore, their impact on currency is only incidental.
  • The RBI resorting to selling USD in two tranches will keep a check on Rupee’s volatility and help curb its depreciation to some extent.
  • For the bond market, the exercise may have a pronounced impact.
Why this Swap needed? 

  • 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.
Source- Indian Express 

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