There is global instability in financial markets due to the spread of COVID 19 (Coronavirus), which may lead to a slowdown in growth. Every economy is making efforts to stabilize the financial market condition, among them, the Central Bank of India i.e. Reserve Bank of India (RBI) has opened a six-month dollar sell-buy swap window, and will also inject Rs 1,00,000 crore additional Long Term Repo Operations (LTROs) at the policy repo rate. These measures taken by RBI are to boost liquidity in the foreign exchange market of India and will serve the requirement of U.S. dollars in the market.About RBI 6 month dollar-swap window; 1 swap auction undertook worth $2 billion; other queued on Mar 23, 2020
RBI is trying to restore dollars in the market, as there has been a huge outflow of the dollar from banks due to the selling of shares by foreign institutional investors (FIIs). Since February 24, 2020, $4.7 billion worth of such share is sold. In order to tackle this situation, RBI will undertake second 6-month dollar/rupee sell/buy swap auction on 23 March 2020.
- Under this, RBI will provide $2 billion to the banks that need it through a swap. Simply, RBI will give dollars and the buyer bank will give rupees and the transaction will be reversed on September 25, 2020. This is the second time RBI has come out with the dollar-swap window in this month.
- Earlier, on March 16, 2020, RBI conducted U.S. dollar-rupee sell-buy swaps worth $2 billion.
About RBI’s LTRO of Rs 1 lakh crore
Apart from the dollar swap window, RBI also conducting long-term repo operations (LTRO) of Rs 1,00,000 crore in multiple tranches at the policy rate. Accordingly, RBI conducted the fifth tranche of the 3-year LTRO for Rs 25,000 crore on 18 March 2020 to secure adequate liquidity to the troubled financial markets. The central bank has already conducted four such operations of Rs 25,000 crore each since February 14, 2020.
- Read about LTRO initiation by RBI in February 2020 here: RBI conducts 3- year Long Term Repo Operations(LTRO)’s for ₹25,000 crore
- Based on further review of evolving liquidity conditions, RBI will decide on additional tranches of the LTROs separately.