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RBI Conducted A $5 Billion Dollar-Rupee Swap

RBI Conducted A $ 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 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.
  • The central bank’s move will reduce the pressure on inflation and strengthen the rupee.
  • 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.

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