Economy

·        Its a forex tool whereby the central bank uses its currency to buy another currency or the vice versa. during a Dollar–Rupee buy/sell swap, the central bank buys dollars (US dollars or USD) from banks in exchange for Indian Rupees (INR) and straightaway gets into an opposite deal with the banks promising to sell dollars at a later date.

·        In a dollar–rupee sell/buy swap it sells USD in exchange for INR and promises to buy dollars from banks after some years.

·        On March 10, the RBI will sell USD 5 billion to banks that have bid at the lowest currency premium.

·        The intent here is that the central bank acquires dollars from the seller, charging the lowest premium possible for the two-year tenor.

·        Accordingly, The banks that bid at the lower range of the auction are successful at the auction.

·        Assuming  a greenback rate of Rs seventy five, the system liquidity will shrink by Rs 37,500 crore.

·        RBI has a 2 year window to buy back these dollars. interestingly, apart from March 10, the far leg of March thirteen, 2019’s three-year USD–INR buy/sell auction falls due on March 28, 2022.

·        This again is a USD five billion swap, where RBI will sell dollars to banks.

·        With 2 sell auctions at play in March, nearly Rs 75,000 crore of surplus liquidity might be sucked out of the system.

·        Impact (Dollar–Rupee sell/buy swap) Dollar inflows from the auction and inflows of a like amount from a maturing swap towards the month end is expected to cool the volatility in the USD-INR exchange rate Reduce the supply of money from the economy thus, decline in inflation without changing the accommodative stance of monetary policy.

·        Increase in capital inflows thus, reducing current account deficit.

·        Increase credibility of Gov stabilization policies and so, encourage investor and consumer confidence in the economy.

·        Forex swaps help in liquidity management-longer-term to liquidity adjustment tools.

·        A dollar–rupee buy/sell swap injects INR into the banking system whereas sucking out the dollars, and the reverse happens in a very sell/buy swap. Liquidity intervention through swaps indicates the RBI’s plan to use a different toolkit instead of the traditional ones, and this leaves room for the central bank to buy bonds when needed.

·        Consequently, the strategy will contain bond yields.

·         Usually, in May, RBI makes its dividend payment to the govt for the previous fiscal.

·        The excess from these swaps might be pad up the pay-outs.