About Forex swap auction
- RBI normally uses Open Market Operations (OMOs) to inject liquidity into the system. However, this is first time that Forex Swap auction has been deployed as a tool by the RBI for liquidity injection.
How it will work?
- The swap is in the nature of a simple buy/sell foreign exchange swap with the RBI.
- Under the buy/sell forex swap, a bank will sell dollars to the RBI and simultaneously agree to buy the same amount of dollars at the end of the swap period (three years in this case).
- The dollars raised through the auction would also reflect in RBI’s foreign exchange reserves and in its forward liabilities.
Impact on the economy
- By selling dollars to the RBI, the additional liquidity puts more money in the hands of banks and eventually will flow into the system, which can support credit growth and soften bond yields.
- The auction is expected to immediately release $5 billion worth of rupee liquidity into the banking system.
- The move can inject $ 13 billion worth of liquidity into the system with no cost on the central bank.
Significance of the move
- Bringing down short-term interest rates for borrowers
- Helping the RBI to mop up a larme amounts of dollars at one go
- Infusing liquidity
- Preventing any sharp appreciation in the rupee
Section : Economics