The Reserve Bank of India has successfully concluded a forex swap auction intended to ease liquidity conditions.The central bank bought the targeted $5 billion as part of the long term Dollar/Rupee swap auction with a three-year tenor.In turn, Rs 34,561 crore was infused into the Indian banking system.
Recently,RBI has decided to inject long-term liquidity into the system through foreign exchange swap arrangement.The swap is in the nature of a simple dollar-rupee exchange with the RBI.
A bank shall sell U.S. dollars to the RBI,in turn the RBI will pay rupees to the participating banks at the current spot rate.
Simultaneously,the banks will agree to buy-back the same amount of dollars from the RBI after three years,the tenor of current auction.The final exchange rate will be decided by an auction where banks will bid on the forward premium,they are willing to pay.
The expected benefits of forex swap are (a)Increase liquidity in market (b)Increase in RBI’s foreign exchange reserves and (c)Improve credit as it will put more money in the hands of banks.