Dollar-Rupee Swap, a financial tool introduced by RBI helps in promoting macro-economic stability of the Indian Economy. Discuss (200 Words)
Refer - Business Line
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IAS Parliament 6 years
KEY POINTS
· The RBI’s two remarkably successful auctions for dollar-rupee swaps indicate that this tool has been designed in such a way that it meets the requirements of all stakeholders.
· Not only has the auction helped the RBI meet its objective of infusing liquidity into the system at a particularly challenging juncture and help bolster forex reserves, it has also helped banks and corporates put their dollar holdings to good use.
· The aim of the swap arrangement was to infuse durable liquidity into the system, without disrupting either the foreign currency or bond markets.
· Banks had to initially sell US dollars to the RBI at the reference rate on the date of the auction and receive rupees in return, which were to be used to meet credit demand.
· In the second phase of the transaction, the amount in rupees, along with the premium that was bid, had to be returned to the RBI at the end of three years and the RBI had to return the dollars to the banks.
· It’s clear that the auction has provided a channel through which entities in possession of dollars raised through overseas loans, could earn additional revenue.
· Borrowers who wanted to hedge their future cash-flows would have also found the swap useful. With borrowing rates in international markets ruling lower than the annualised premium bid in the auctions, it would have also have been possible to borrow dollars from overseas to deliver to the central bank.
· Higher liquidity is expected to facilitate better transmission of policy rate cuts. Since the forex swap does not impact the spot market of the rupee, any impact in the spot currency market is likely to be short-lived. This move will also reduce pressure on bond yields.
· The forex market will be benefited through the swap arrangements as it helps bolster forex reserves at a time when financial markets are in a turmoil due to rising crude oil prices.
Since the dollars purchased through the auction will be a part of forex reserves for three years, it can be used by the RBI in market interventions, if needed.
SARI 6 years
Please Review.....
IAS Parliament 6 years
Good answer. Keep Writing.
Vandana 6 years
Kindly review...:)
IAS Parliament 6 years
Good answer. Keep Writing.
