On Wednesday, the Reserve Bank of India (RBI) announced that it will conduct a US dollar swap auction on March 26 where banks will receive rupees in exchange for US dollars in order to inject liquidity into the system. This is the first time RBI is conducting an auction of this kind as opposed to buying bonds to infuse liquidity.
The deal that the RBI offers is that it will buy back the dollar funds after a period of 3 years for rates fixed by the parties. The total amount to be swapped under this facility is $5 billion dollars. During the auction, authorised dealers can make bids for the premium amount they would be willing to pay for the 3-year period. The premium will be calculated on paisa terms.
The minimum bid size for the deal has been set at $25 million and only specific bids will be accepted for the quoted amount. While each bank is permitted to make multiple bids, the value of all bids put together should not exceed $5 billion.
The dollars accumulated through the exchange will build up RBI’s foreign exchange reserves during the 3-year period as well as its forward liabilities.
The central bank has conducted many bond purchases this fiscal year in order to inject liquidity. So far, it has infused over Rs.2.36 lakh crore in the system.
As per a report by Business Standard, the system is short of Rs.1 trillion but the condition will worsen in the next few days due to the outflow of advanced tax payments which are valued at approximately Rs.1.5 trillion and GST at Rs.1 trillion.
Experts opine that the liquidity balance will return only in the next fiscal year when the government starts making expenditures.
Source: Economic Times and Business Standard