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.