RBI Announces $2 Billion USD/INR Sell-Buy Swaps To Enhance Liquidity In The Forex Market

Taking cognisance of the current financial market conditions and requirement of US Dollars in the market, Reserve Bank of India (RBI) has decided to undertake 6-month US Dollar sell/buy swaps to provide liquidity to the foreign exchange market, reports Financial Express.

As per RBI press release, the swaps will be conducted via auction route in multiple tranches. In first such phase, an amount of USD 2 billion would be offered on 16 March 2020.

Under US dollar sell/buy swap, banks can buy dollars from the central bank and at the same time agree to sell the same amount of US Dollars at the end of the swap period to the RBI.

The FE report quoted MV Srinivasan, vice-president, Mecklai Financial Services, as saying that the central bank was probably attempting to pre-empt a very steep fall in the value of the domestic currency.

“The dollar sell/buy swaps will calm the forex markets as the central bank steps in to provide the requisite dollar liquidity in the wake of the FPI outflows. We could see even more of these swaps going further if the situation demands,” Srinivasan reportedly added.

This move is undertaken to enhance the foreign currency availability in the market and arrest the acute decline in the value of Indian rupee.

The Indian rupee depreciated to a record low of 74.50 in its initial trade on Friday (13 March) following the persistent fears of the coronavirus outbreak and bear run in the global financial markets.

The Foreign Portfolio Investors have been relentlessly selling their positions in debt and equity markets in India.

According to reports, since 24 February or the last 13 trade sessions, the FIIs have pulled out funds worth Rs 35,675 crore.

Yesterday (12 March), when Indian stock market witnessed biggest ever single day fall, there was a massive outflow of foreign funds worth Rs 3,475.29 crore from India's domestic stock markets -- S&P BSE Sensex and NSE Nifty50.

However, this problem is not just limited to India. Ever since coronavirus has taken serious turn by spreading in almost all parts of the globe, global markets have remained volatile. According to analyst data, while markets in US and UK have lost almost 26 per cent of its value in last one month, index in emerging markets such as Brazil has fallen by about 27 per cent.

Markets in other parts of the globe such as Canada, South Africa, Australia, South Korea have all fallen consistently in the last several sessions.

The problem is further amplified by the slump in international crude prices and a decline in bond yields in advanced economies. "Flight to safety has led to a spike in volatility across all asset classes, with several emerging market currencies experiencing downside pressures,” said the RBI statement.

Further, the RBI assured that it is closely and continuously monitoring the rapidly evolving global situation and spillovers. The RBI added, “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.”

Additionally, the nation’s forex reserves jumped to an all-time high of $481 billion on 6 March 2020. The surge in the nation’s forex reserves holds significance as they serve as back funds in times of emergencies and contingencies, and can also be utilised to maintain liquidity in the times of an economic crisis, or a foreign obligation.

(With IANS Inputs)