Demystifying RBI’s dollar rupee swap sell/buy auction

News: RBI on Thursday,12th March 2020, moved to address the dollar shortage in the market by offering a $2-billion swap for six months.

What is dollar rupee swap auction?

It is the tool used by the RBI to infuse/suck out the liquidity in the economy and manages the currency pressure. It is operated through an exchange between the US dollar and the rupee

How it works?

Under dollar rupee sell/buy swap auction, Banks shall buy US dollars from the Reserve Bank of India. Against this INR rupees, Reserve Bank of India gives US Dollar to the banks.

RBI is trying to increase the US dollar liquidity in the market as there is a mismatch. The sell/buy swap to boost dollar liquidity should be seen in the context of the rupee opening 62 paise weaker on Thursday at 74.25/26 to the dollar (against the previous close of 73.63/64) and closing at 74.2150/2250. Intra-day the rupee tested a high and a low of 74.35 and 74.08, respectively.

Objective of USD/INR Buy/Sell swap auction?

In a statement on its website, the RBI said it was doing the swaps in view of the intense selling pressure witnessed worldwide on “extreme risk aversion due to the spread of COVID-19 infections”. This is “compounded by the slump in international crude prices and a decline in bond yields in advanced economies”. All asset classes are witnessing a spike in volatility, with mismatches in US dollar liquidity accentuating across the world, it noted.

Thursday’s swap is the first of many such possible ones to come, as the Indian central bank gears up to utilise its formidable foreign exchange reserves to soothe the nerves of the market. For this purpose, the level of forex reserves, at $487.24 billion as of March 6, “remains comfortable to meet any emergency.

It will ease the pressure on the rupee which is marching towards its record low.

Bottomline

The Reserve Bank of India is closely and continuously monitoring the rapidly evolving global situation and spill overs. It stands ready to take all necessary measures to ensure that the effects of the COVID-19 pandemic on the Indian economy are mitigated, and financial markets and institutions in India continue to function normally.

Dollar rupee sell/buy swap auction move is one of them.

Happy Investing.

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