The Reserve Bank of India's (RBI) move to inject liquidity worth $5 billion through foreign exchange swap arrangements with banks arises from the urgency of boosting liquidity in the economy, reports say. With the country facing a general election, the government of Prime Minister Narendra Modi can ill-afford to have a stagnant economy with negative employment generation. Though the interim budget Piyush Goyal presented in the absence of Finance Minister Arun Jaitley introduced several measures calculated to boost liquidity and energise the economy, most of them would come into effect only in the new financial year beginning on April 1 when the country would be well into the election mode.
The swap will be in the nature of a simple buy/sell foreign exchange swap from the RBI side, reports say. Under the swap, a bank would sell US dollars to the RBI and simultaneously agree to buy back the same amount of US dollars at the end of the swap period, effectively allowing RBI governor Shaktikanta Das to release more funds into the system.
"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…," an RBI statement said.
The US dollar amount to be mobilised through the auction that would conclude 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, a report said.
RBI officials said the market participants would be required to place their bids in terms of the premium that they were willing to pay to the RBI for the tenor of the swap, expressed in paisa terms up to two decimal places. The minimum bid size for the swap would be $25 million and in multiples of $1 million thereafter, according to the statement.
According to bankers, the move is seen to lower the dependence on open market operations which have been a significant amount of the overall borrowing, a report in The Hindu said. The move would boost RBI's foreign exchange reserves which were at $401.7 billion for the week that ended on March 1.
Meanwhile, the RBI has raised the trade credit limit under the automatic route to $150 million for oil/gas refining and marketing, airline and shipping firms. For others, the limit is set at $50 million or equivalent per import transaction, according to the report. The revised framework also reduced the all-inclusive cost (all-in-cost) for overseas loans to benchmark rate plus 250 basis points from the earlier 350 bps.