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The Reserve Bank of India announced on Wednesday to infuse long term liquidity worth $5 billion into the system through Foreign Exchange swap arrangement with banks for 3 years.
The RBI will conduct long term buy/sell swaps for converting Dollars to Rupees.Dollar/rupee buy/sell swap auction of $5billion for the tenor of three years will be conducted on March 26, 2019.
RBI to inject Rupee liquidity through long term USD/INR Buy/Sell Swap auctionhttps://t.co/xol6IKOjrP— ReserveBankOfIndia (@RBI) March 13, 2019
"In order to meet the durable liquidity needs of the system, the Reserve Bank has decided to augment its liquidity management toolkit and inject rupee liquidity for a longer duration through long-term foreign exchange Buy/Sell swap...," the RBI said.
The US Dollar amount mobilized through the auction, to be conducted on March 26, would also reflect in RBI's foreign exchange reserves for the tenor of the swap while also reflecting in RBI's forward liabilities.
The market participants, it said, would be required to place their bids in terms of the premium that they are willing to pay to the RBI for the tenor of the swap, expressed in paisa terms up to two decimal places.
Whereas, this infusion of liquidity could also be viewed through a political lens. Political parties ideally like the financial system to be surplus liquidity in times of elections, but experts say it is also likely that this route is being adopted to insulate bond yields and broader interest rates.