A new tool in apex bank’s repertoire–Economic Times

The RBI’s successful rupee-dollar swap pilot is likely to entrench this as a liquidity management tool in the central bank’s repertoire. The swap represents proactive use of the relationship between monetary policy, exchange rate and cross-border capital movement normally articulated as passive helplessness in the face of ‘the impossible trinity’. The initial central bank dollar rupee swap for three years has received an enthusiastic response, with banks offering $16.31 billion for the rupee-dollar swap auction of up to $5 billion. It has simultaneously injected liquidity in the system, brought down the forward premium on the dollar, strengthening the incentive for foreign funds to enter the Indian market and reduced dependence on central bank bond purchases for injecting liquidity.

The rupee-dollar swap auction shows banks that need liquidity to expand credit have grabbed the offer. This year, the RBI infused liquidity mostly through bond purchases from the secondary market. It stood at over Rs 3 lakh crore, or a staggering 71% of net government borrowings this fiscal. Excessive reliance on open market operations poses the risk of artificially depressing interest rates, and creating extra room for government borrowing. Injecting liquidity via the dollar swap reduces such distortion.

The immediate effect of the swap operation is similar to the RBI’s intervention in the currency markets to mop up dollars to check rupee appreciation. When the RBI buys dollars, it injects fresh liquidity into the system. If the additional liquidity so created is seen to be excessive and building inflationary expectations, the RBI then absorbs the rupees by selling the so-called market stabilisation bonds. Open market operations are still on standby, to moderate liquidity to desired levels.

This piece appeared as an editorial opinion in the print edition of The Economic Times.
Recommended By Colombia

via A new tool in apex bank’s repertoire

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s