The Reserve Bank of India has successfully concluded a second forex swap auction intended to ease liquidity conditions.
The auction saw a strong demand with the Reserve Bank of India getting 255 bids worth $18.65 billion compared with the notified amount of $5 billion.Earlier,RBI had bought $5 billion through a similar swap auction.
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.