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
