A key highlight of Governor Sanjay Malhotra’s policy statement, was not only the ₹1 lakh crore Open Market Operation (OMO) in the month of December, but also a three-year Dollar-Rupee sell swap, which will also take place this month.
The buy-sell swap will be worth $5 billion.
Here’s a look at the USD-INR sell swap in greater detail:
What Is The USD-INR Sell Swap?
A Dollar-Rupee sell swap is a foreign exchange transaction where banks will sell US Dollars to the Reserve Bank of India, in exchange for the local currency, in this case, the rupee.
The RBI will then make separate, future agreements with the lenders to sell the same US Dollars back to them at a pre-determined rate and date.
The rate for the future transaction is generally at a premium to the rate at which the US Dollars were sold to the RBI.
Purpose & Use Case for the USD-INR Swap
The RBI uses this as a liquidity management tool to decrease the amount of rupees in the banking system, helping control inflation.
Such a mechanism also helps stabilize the rupee by providing a source of US Dollars to the market, which reduces pressure on the currency. The currency was a major talking point of the week before the RBI policy as it fell to record lows of 90.42 on Thursday before staging a recovery towards closing.
While managing the rupees in the banking system, it also provides US Dollars to banks, thereby increasing the Dollar liquidity in the market.
You can catch all the LIVE policy updates right here.
