Dollar–Rupee SWAP AUCTION-Economy (6th April) - Sleepy Classes Skip to main content

Dollar–Rupee SWAP AUCTION-Economy (6th April)

By April 6, 2022April 8th, 2022Economy, GS 3

Dollar–Rupee SWAP AUCTION

  • Dollar–Rupee Swap auction is a forex tool whereby the central bank uses its currency to buy another currency or vice versa.
  • In a Dollar–Rupee buy/sell swap, the central bank buys dollars (US dollars or USD) from banks in exchange for Indian Rupees (INR) and immediately gets into an opposite deal with banks promising to sell dollars at a later date.

imageObjective

  • When the central bank sells dollars, it sucks out an equivalent amount in rupees, thus reducing the rupee liquidity in the system. 
  • Dollar inflow into the market will strengthen the rupee which has already hit the 77 level against the US dollar.
  • Surplus liquidity in the system is pegged at Rs 7.5 lakh crore, which needs to be curbed to keep a tab on inflation.
  • The RBI normally brings down liquidity in the system when inflation threatens to rise sharply. With crude oil prices rising sharply in the wake of the Russia-Ukraine war, inflation is set to rise in the coming days.

Impact

  • The RBI resorting to selling USD in two tranches will keep a check on Rupee’s volatility and help curb its depreciation to some extent.
  • Further, foreign portfolio investors have been pulling out funds from India. 
  • They have withdrawn Rs 34,000 crore from Indian stocks in March so far, putting severe pressure on the rupee. 
  • After the swap auction, the rupee recovered to 76.92 from 76.97

Will the government gain from the swaps?                

  • Going by the experiences in 2019 and 2020, the likely gains from the swap auctions could be around Rs 8,400 crore.
  • If RBI gains, surplus can be transferred to the govt.
  • RBIannounces another $5-bn dollar/rupee swap on April 26

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