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Reserve Bank steps into forex market to support rupee

The swap will be reversed in September 2020 when RBI will buy back the dollars at a premium determined by the auction (Mint)Premium
The swap will be reversed in September 2020 when RBI will buy back the dollars at a premium determined by the auction (Mint)

  • The Reserve Bank said it will conduct six-month US dollar sell-buy swaps worth $2 billion on 16 March
  • The pandemic has prompted global investors to seek safe-haven assets, with even foreign portfolio investors turning into net sellers in the Indian markets

MUMBAI : The Reserve Bank of India (RBI) has stepped into the currency markets with large dollops of liquidity to support the rupee, as the Covid-19 pandemic sends shock waves through global markets.

The central bank said in a statement on Thursday that it will conduct six-month US dollar sell-buy swaps worth $2 billion on 16 March. This is expected to be the first of several such swap auctions.

“Financial markets worldwide are facing intense selling pressures on extreme risk aversion due to the spread of coronavirus infections, compounded by the slump in international crude prices and a decline in bond yields in advanced economies. Flight to safety has led to a spike in volatility across all asset classes, with several emerging market currencies experiencing downside pressures. Mismatches in US dollar liquidity have become accentuated across the world," RBI said in a statement.

The central bank also assured that the current level of forex reserves at $487.24 billion remains “comfortable to meet any exigency."

The pandemic has prompted global investors to seek safe-haven assets, with even foreign portfolio investors turning into net sellers in the Indian markets. The flight to safety has taken a toll on the Indian currency: On Thursday, the rupee hit 74.34 against the US dollar, approaching its all-time low of 74.48 seen in October 2018. The Indian currency recovered marginally to close at 74.22 against the dollar.

Through this auction, RBI will sell US dollars totalling $2 billion at the current spot rate. In return, RBI will buy rupees from the participating banks. This supply of dollars is expected to quell the additional demand for dollars from FPIs liquidating their equity and bond positions.

The swap will be reversed in September 2020 when RBI will buy back the dollars at a premium determined by the auction. According to bankers, this auction is seen as a proactive step by the RBI as there is no dollar shortage in the system currently. They also added that the $2 billion auction may be the first of many more to come.

“There are signs of dollar shortage in the market. Banks’ foreign offices are not getting funds. There is massive discount sentiment and bankers are not willing to lend. The one-year forward premia bounced back after the announcement by RBI," said the forex treasury dealer in a state-owned bank.

Speaking at the Mint Annual Banking Conclave on 24 February, RBI governor Shaktikanta Das had warned that banks must be prepared to face the challenges in the wake of the viral epidemic, as slowing global growth will add to the stress of the Indian corporate balance sheet. Central banks across the world including the US Federal Reserve and the Bank of England have announced emergency measures, including interest rate cuts. In India, too, economists expect the Monetary Policy Committee to cut rates either before or at its next meeting in April.

The RBI reiterated that it stands ready to take all necessary measures to reduce the impact of the spreading virus on the economy.

“The Reserve Bank of India is closely and continuously monitoring the rapidly evolving global situation and spillovers. It stands ready to take all necessary measures to ensure that the effects of the Covid-19 pandemic on the Indian economy are mitigated, and financial markets and institutions in India continue to function normally," the statement said.

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