NEW DELHI :
The US Federal Reserve on Tuesday gave the Reserve Bank of India (RBI), as well as all other central banks, currency swap facility to help them fund their dollar requirements. The facility was so far extended to select central banks that did not include the RBI or the People’s Bank of China.
The Fed’s move is a very positive and accommodative step and will help stabilize markets, reduce volatility, and ease pressure on currencies such as the rupee, said analysts
RBI had recently, albeit informally, requested the Fed to be given this facility, said a person aware of the development. The facility, effective 6 April, will be in place for at least six months, the Fed said.
The RBI did not respond to emailed queries if it had recently sought this facility. The RBI, under its former governor Urjit Patel, had in 2017 urged the Fed for access to the facility, then enjoyed by the European Central Bank, the Bank of Japan, the Bank of England, and some others.
The RBI had expressed the desire for a currency swap agreement with the Fed because of the pressure on the rupee over the last couple of weeks, said the person cited above. On 19 March, the Fed had announced currency swap agreements with some of the world’s top central banks with the aim of containing the risks of shortage of dollars in global markets. It however excluded India at the time.
With the currency swap option being given to central banks and other international monetary authorities, they can now enter repurchase agreements with the Fed and temporarily exchange their US treasuries held with it for US dollars.
World markets, be they equities, bonds, oil, currency, or others, have been in turmoil over the past month because of fears of recession, caused by the rapid spread of Covid-19. Most equity markets have plunged 30%-40%, while crude touched 18-year lows to trade below $20.
India’s healthy dollar reserves notwithstanding, RBI believes that currency swap lines can provide it with much needed ammunition to stabilize trade and forex outflows during volatile times such as the current crisis. The central bank’s dollar reserves fell to $437 billion as on 27 March from $447 billion a week earlier, due to the selling in the markets but still remain robust, according to RBI data.
The uncertainty has led to a surge in demand for the world’s safest currency, causing it to appreciate significantly against other currencies. In the first three months of 2020, the rupee has weakened by 5.5% against the US dollar. It closed at 75.63 against the greenback on Tuesday. It had weakened to an all-time low of 76.33 on 23 March, a 6.5% erosion since 31 December.