Recently, Reserve Bank of India (RBI) has opened a six-month dollar sell-buy swap window to pump liquidity in the foreign exchange market.
Reason for such move:
- Turbulence in the financial market: Current slowing down of the Indian economy and spread of COVID-19, which could lead to a further slowdown.
- Risk-averse financial markets worldwide: Due to the spread of COVID-19 infections, compounded by the slump in international crude prices and a decline in bond yields in advanced economies.
- As per the NSDL (National Securities Depository Limited) data, foreign investors have pulled out foreign capital worth Rs 33,164 crore in local debt and equity since the start of March.
- Mismatches in US dollar liquidity: Have become accentuated across the world. The requirement of US dollars in the market was observed in a review of the current financial market.
What is the dollar Sell-Buy window?
- RBI buys dollars from banks instead of bonds but wants to return these dollars at the end of the time period decided for a ‘forward’ premium.
- This premium is determined through an auction.
- RBI is doing two things: buying dollars from banks and selling ‘forward dollars’ for a price or premium.
- The swaps will be conducted through the auction route in multiple tranches. The auctions will be multiple prices based, i.e., successful bids will be accepted at their respective quoted premiums.
- Authorized Dealers (ADs) Category 1 banks will be the eligible entities to participate in the auction.
- It will not have any negative effect on the Forex reserves of the country since the level of forex reserves remains at $487.24 billion as of March 6, 2020. Such a large reserve amount makes a comfortable room to meet any exigency.
The benefit of dollar sell-buy swap:
- Increases the supply of rupees in the market.
- For a common man, this auction is expected to improve fund availability with the banks.
- For businesses: the hedge cost for the importers is likely to come down as increased rupee liquidity is likely to bring down the forward rates.
National Securities Depository Limited
- It is a securities depository in India that holds the securities of investors like shares, bonds, and debentures in electronic format.
- It is the first and largest central securities depository in India that was established to sort out the issues associated with the paper-based settlement of securities such as bad delivery and delayed transfer of title.
- NSDL was established in I996, after the enactment of the Depositories Act, 1996, to facilitate trading and settlement of securities in electronic format.
- It enabled the investors to transfer the ownership of securities through simple account transfer without involving in paperwork.
- It is headquartered in Mumbai, India.