RBI’s $5 billion dollar-rupee swap

RBI’s $5 billion dollar-rupee swap

Part of: Prelims and GS-III Economy

Context: The Reserve Bank of India (RBI) recently conducted a $ 5 billion dollar-rupee swap auction as part of its liquidity management initiative.

• The action has led to infusion of dollars and sucking out of the rupee from the financial system. 
• It will reduce the pressure on inflation and strengthen the rupee.

What happens during the swap auction?

• The RBI sold $5.135 billion to banks on March 8 and simultaneously agreed to buy back the dollars at the end of the swap settlement period. 
• When the central bank sells dollars, it sucks out an equivalent amount in rupees, thus reducing the rupee liquidity in the system. 
  • Liquidity means the availability of liquid assets in the market.
• Dollar inflow into the market will strengthen the rupee which has already hit the 77 level against the US dollar.
• The swap auction can be done in the reverse way also when there is shortage of liquidity in the system. 
• The RBI then buys dollars from the market and releases an equivalent amount in the rupees.

News Source: IE