The Reserve Bank of India’s Governor has said that the market response to the foreign exchange swap arrangement announced by RBI has been received well.
Recently,RBI has decided to inject long-term liquidity into the system through foreign exchange swap arrangement.The word swap means exchange.
Under this arrangement,banks would be required to keep dollar funds with RBI with a deal to buy it back from the RBI after three years.The dollars raised through this arrangement will reflect in the RBI’s foreign exchange reserves.
The forex swap just like Open market operations(OMO) puts more money in the hands of banks,who in turn have the discretion to decide whether to step up credit into the market.
Open market operations (OMO) refer to a central bank’s buying and selling of government securities in the open market in order to expand or tighten the amount of money in the banking system.RBI carries out the OMO through commercial banks and does not directly deal with the public.