Mumbai: The Reserve Bank of India (RBI) said that it has enough forex reserves and would supply banks dollars for six months through sell-buy swaps to ensure supply at a time of turmoil in global markets. The announcement came as the rupee hit a lifetime low of 74.48 in intra-day trades in the interbank market, in line with the rout in equity markets.
With state-owned banks selling dollars, the rupee recovered to close at 74.22, which was 58 paise lower than Wednesday. One positive news was the improvement in the country’s current account deficit (CAD), which narrowed sharply to $1.4 billion, or 0.2% of the GDP, for the December 2019 quarter as against 2.7% a year ago and 0.9% in the preceding quarter. However, with equity markets suffering their worst loss over fears of the coronavirus pandemic triggering a recession, overall sentiment was negative.
“The RBI is closely and continuously monitoring the rapidly evolving global situation and spillovers. It stands ready to take all necessary measures to ensure that the effects of the Covid-19 pandemic on the Indian economy are mitigated, and financial markets and institutions in India continue to function normally,” the RBI said in a statement. The central bank’s forex reserves currently stand at $487.2 billion.
The RBI said that it will conduct six-month US dollar sell-buy swaps to provide dollar liquidity to the foreign exchange market, with the first such swap for $2 billion to be held on March 16. The swap amounts to lending dollars to banks as there is a simultaneous contract to buy them back.
According to DBS Bank country treasurer Ashish Vaidya, there is a global shortage of dollars. “Globally, corporates are stocking up on cash by selling treasuries. Given the market conditions, they are engaging in deleveraging, which is resulting in a shortage of dollars,” he said. “The sell-buy swaps will generate dollar liquidity and ensure that the rupee does not weaken sharply.”
However, dealers do expect the rupee to come under pressure. “Unlike the previous swaps, this time the RBI will be selling dollars and simultaneously purchasing at the end of the swap period. With sufficient FX reserves to meet any contingency, such a move would enhance dollar liquidity in the FX market,” said IFA Global founder Abhishek Goenka. “This will calm down the pressure on the rupee to a certain extent. At the end of the swap, as the dollar will be bought back, the RBI will be at a comfortable position. This will encourage the central bank to do more sell-buy swaps until the rupee volatility is contained,” he added.
“The swaps will result in a reduction of rupee liquidity. But the RBI is likely to offset that by conducting long-term repo operations (LTROs). In fact, the RBI could consider doing repo below its benchmark rates if it wants to bring down interest rates before the MPC,” said Vaidya.
Source: timesofindia.indiatimes.com