RBI Swap Auction 25/04/2019 – Posted in: Daily News
RBI swap auction
For: Mains
Topics covered: Dollar-Rupee buy/sell, Swap auction,
News Flash
The second dollar-rupee buy/sell auction also saw healthy demand with the Reserve Bank of India getting 255 bids worth $18.65 billion compared with the notified amount of $5 billion.
What a Swap Auction is?
It’s a new policy tool being used by RBI to increase liquidity.
High-street banks would sell dollars to the RBI at a dollar-rupee exchange rate fixed by the central bank. Three years later, the banks would buy back the dollars, in rupee terms, at an exchange rate that includes the cut-off premium.
The cut-off premium is the threshold for banks to receive any allotment. Banks bidding at the cut-off level or above would get allotments. Through this auction, the RBI will buy US dollars from banks totalling to $5 billion. In turn the RBI will pay rupees to the participating banks at the current spot rate. At an average spot rate of 70 per dollar, the RBI will able to infuse about ₹35,000 crore into the system through this auction process.
Why is it important?
- Will solve liquidity problems since the IL&FS crisis emerged last year.
- In addition to this, the demand for rupees is expected to spike in the coming weeks as a result of a huge spending towards the ongoing general elections.
- For the RBI, the auction will help boost its forex reserve. The forex reserve is one tool which the RBI uses to intervene in the currency market at times of abnormal volatility.
- Improve fund availability with the banks.
- From a business perspective, the hedge cost for the importers are likely to come down as increased rupee liquidity is likely to bring down the forward rates.
- Companies that raise funds via the external commercial borrowing route find this route cost effective due to lower hedging cost as compared to the secondary market.
Source: Indian Express