Home Market RBI’s gift in FY20: Dollar swap auction!

RBI’s gift in FY20: Dollar swap auction!

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MUMBAI: The Reserve Bank of India (RBI) will conduct its second dollar-swap auction in a month to inject $5 billion (about Rs 34,500 crore) of liquidity into the banking system, marking a new trend in balancing the economys cash needs and ensuring speedier transmission of policy rate actions.

“In order to meet the durable liquidity needs of the system, the Reserve Bank has decided to inject Rupee liquidity for longer duration through long-term foreign exchange Buy/Sell swap in terms of its extant Liquidity Management Framework,” RBI said Monday.

The central bank will conduct the auction on April 23.

“The US Dollar amount mobilized through this auction would also reflect in RBIs foreign exchange reserves for the tenor of the swap while also reflecting in RBIs forward liabilities,” said the RBI note.

This is how the swap mechanism would work: High-street banks would sell dollars to the RBI at a dollar-rupee exchange rate fixed by the central bank. Three years later, the banks would buy back the dollars, in rupee terms, at an exchange rate that includes the cut-off premium.

The cut-off premium is the threshold for banks to receive any allotment. Banks bidding at the cut-off level or above would get allotments. Normally, the premium comes to less than the three-year MIFOR (Mumbai Interbank Forwards Rate).

On March 23, the RBI conducted a similar auction to an overwhelming response. It had received bids for $16.3 billion against $5 billion on offer, the actual sum targeted to help ensure enough system liquidity before the financial Read More – Source