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All About The RBI Swap Auction


Posted on 2019-05-24 in KNOWLEDGE PORTAL

 

Every economy requires a basic amount of liquidity for its proper functioning. Liquidity means the amount of cash available in the markets of a country so that everyone has money in cash form to do their daily transactions.

The central bank of India, RBI maintains liquidity in the system by many ways. It buys bonds from the government and/or other banks in exchange of which RBI pays them cash which the government and banks can use in their expenditures and loan distribution. Generally this is the method of injecting liquidity in the market used by the apex bank. It helps in balancing the economy’s cash needs and ensuring speedier transmission of policy rate actions. 

For the first time in March 2019, the RBI used the swap auction to infuse liquidity in the system. Since the Il&FS crisis, there had been a lack of long term investments by the investors since the NBFCs could not raise long term capital through bonds etc. Even the banks are unable to lend money to risky businesses like real estate due to their already heavy NPAs and strict rules. The demand for rupees is expected to spike in the coming weeks as a result of a huge spending towards the upcoming general elections that starts next month. So, the timing of the RBI’s auction, at the end of the financial year seems to have taken into account these factors.

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. Under the swap, banks will sell US dollars to the central bank and simultaneously agree to buy the same amount of greenbacks at the end of the swap period, which, in this case, is three years. The dollar amount mobilised through this auction would also reflect in the RBI’s foreign exchange reserves for the tenor of the swap while also reflecting in RBI’s forward liabilities. Only the category 1 banks are allowed to participate in this auction.

Simultaneously, the banks will agree to buy-back the same amount of dollars from the RBI after three years — the tenor of this auction. The participating banks have to bid in the auction by quoting a forward premium in terms of paisa that they will pay to buy back the dollars.

Sources

1. Business Standard

2. Economic Times

3. The Hindu Business Line

4. Live Mint







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