Rupee-Dollar Currency Swap

Did you know that many currencies across the world have been depreciating due to the Russia Ukraine war? But the dollar is becoming stronger and due to this, the rupee has gone to its historic low, i.e. 77 rupees to a dollar. Now, to keep it in check, the RBI has decided to conduct a dollar-rupee swap of $5 billion. Not only this, the RBI’s dollar-rupee swap auction saw 3 times more bids. How does RBI control the depreciation of the rupee and how can inflation be controlled by this? Let’s explore in this article.

Recently, the Reserve Bank of India conducted a $5 billion dollar-rupee swap auction on Tuesday as part of its liquidity management initiative. The RBI being the national bank, has the responsibility to keep inflation in check by managing liquidity in the market. What the RBI did was that it increased the supply of dollars in the market and sucked out the rupee from it. The RBI claims that this move will reduce inflation pressure and strengthen the rupee. By auction, it means that RBI is dealing with different banks that have rupees, and it is exchanging $5 billion with the banks in exchange for rupees. RBI’s planned forex swap went through smoothly. And not only had this happened, but the central bank received bids worth $13.56 billion for the sell auction. The RBI accepted 86 of these bids for $5.135 billion. The dollars will not stay with the banks for a lifetime instead, the first leg of the settlement will be on March 10, 2022, and the second leg will be on March 11, 2024. This means that some part of this $5 billion will be taken back by the RBI on the given dates. Why are banks so interested in taking dollars, then? The banks will get some interest on the dollars after some time. Thus, banks accepting lower interest rates will get the bids.?

How does it affect inflation in the country? By means of currency swaps, the RBI is sucking up the rupee from the market and releasing dollars. We all know that when something is in less quantity in the market its value becomes high, and thus when the rupee is in low quantity its value will improve and the depreciation will stop. Thus, RBI used its forex reserve to do this swap. The RBI would have removed close to Rs 39000 crore from the market. The major impact of this swap will be that liquidity which currently averages around Rs 7.6 lakh crore, will shrink.?The RBI normally brings down liquidity in the system when inflation threatens to rise sharply. Also, with oil prices rising sharply in the wake of the Russia Ukraine war, inflation is set to rise in the coming days. Further, foreign portfolio investors have been pulling out funds from India. They have withdrawn Rs 34000 crore from Indian stocks in March, so far, putting severe pressure on the Indian rupee. Thus, this step will have a positive effect on the value of the Rupee.