RBI likely to have rolled over a part of $5-billion forex swap to boost liquidity

Subject :Economy

Section: External Sector

Key Points:

RBI may have rolled over a portion of its $5-billion foreign exchange swap that was due for maturity in Oct 2023.
Tool likely used is an ultra-short term swap whose maturity would augment system liquidity amid tax outflows and currency leakage in the festive season.

Why did RBI use the $5 billion swap?

On April 28, 2022, the RBI concluded a sell-buy foreign exchange swap under which banks bought US Dollars from the central bank and simultaneously agreed to sell the same amount of dollars at the end of the swap period.
By carrying out the swap, the RBI had drained the banking system of rupee liquidity, which at the time was at a massive surplus of around ₹5 trillion due to central bank cash infusions during the Covid crisis.
The maturity of the swap, which was due on October 23, would have released around ₹40,000 crore into the banking system as purchases of dollars by the RBI inject rupee liquidity into the banking system.

What is a Dollar–Rupee Swap auction?

It’s a forex tool whereby the central bank uses its currency to buy another currency or vice versa.
In a Dollar–Rupee buy/sell swap, the central bank buys dollars (US dollars or USD) from banks in exchange for Indian Rupees (INR) and immediately gets into an opposite deal with 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 dollar from banks after some years.
Why do Central Banks engage in it?
- Forex swaps help in liquidity management. It also, in a limited way, helps in keeping the currency rates in check. A dollar–rupee buy/sell swap injects INR into the banking system while sucking out the dollars, and the reverse happens in a sell/buy swap.