Forex Swap

Why in News?

• The RBI Governor recently stated that the apex bank has several armoury of weapons and it will not hesitate to deploy them. Two of the measures suggested by the governor are Forex Swap and LTRO (Long Term Repo Operation).
• This is being suggested as the global economic growth is affected due to impact of COVID-19 and this in turn is affecting India as well.

Key Highlights

• In order to pump currency into the country, or increase liquidity the Reserve Bank of India has opened six-month dollar buy-sell dollar swap window. The swaps are to be conducted in auction route.
• What is Buy-Sell Dollar Swap Window? : The Reserve Bank will lend US dollars to companies. In turn it will receive equivalent rupees from them. The companies will return the borrowed amount after a certain period of time. With this, the liquidity or flow of currency in the country increases.
• This is because with the amount received in rupees, the RBI for instance will start distributing loans. This will increase currency flow in the country and stabilize depreciating rupee value. The Indian rupee has fallen by 4.07%. This is mainly because the foreign investors are selling their domestic securities due to the panic of the spread of Corona Virus.

Why Liquidity best route for current situation?

• Currently, the situation in such a way that demand in India and all over the world is the same, while there is decrease in supply. This is because there are several mismatches in the businesses all over the world due to the threat of COVID-19.
• Mismatches are cases where a company or business is closed and its dependent is running or vice versa. This will eventually force the dependent to close as well. Such conditions where the demand increases (or remains same) and supply decreases are called liquidity crisis and currently the Corona Virus panic has created such a crisis.

LTRO

• The LTRO is Long Term Repo Operations. The LTRO were deployed during 2008 financial crisis and were huge success.
• LTRO is a tool with which the apex bank offers loans to banks in the country for a period of one to three years at the prevailing repo rate.

PRELIMS QUESTION:

Q. Consider the following statements regarding Forex Swap:

1.In order to increase liquidity the Reserve Bank of India can resort to dollar buy-sell dollar swap window.

2.This will increase currency flow in the country and stabilize depreciating rupee value.

Which of the statements given above is/are correct?

a)1 only

b)2 only

c)Both 1 and 2

d)Neither 1 nor 2

Answer to Prelims question