Dollar swap drive to quell panic
The RBI on Thursday announced a dollar sell/buy programme that will provide banks the much needed foreign exchange to stem the freefall of the rupee that has plummeted to a 17-month low of Rs 74.28 at the end of the day on account of the global panic caused by the coronavirus pandemic.
The central bank under the swap programme will sell dollars to banks and buy them after six months.
The swaps will be conducted through the auction route in multiple tranches. The auctions will be multiple price based — successful bids will be accepted at their respective quoted premiums.The first auction of $2 billion will be held on Monday.
”On a review of current financial market conditions and taking into consideration the requirement of dollars in the market, it has been decided to undertake 6-month dollar sell/buy swaps to provide liquidity to the foreign exchange market,” the RBI said in a statement.
The swap will be in the nature of a simple sell/buy foreign exchange swap from the Reserve Bank side. A bank will buy dollars from the RBI and simultaneously agree to sell the same amount of dollars at the end of the swap period.
The central bank said financial markets worldwide were facing intense selling pressures on extreme risk aversion because of the coronavirus, compounded by the slump in international crude prices and a decline in bond yields in the advanced economies.
The flight of capital from the emerging markets has led to a spike in volatility across all asset classes, with several EM currencies experiencing downside pressures and mismatches in dollar liquidity have become accentuated across the world.
The RBI further pointed out that the level of forex reserves at $487.24 billion as on March 6 remains comfortable to meet any exigency.
States advised to keep deposits
The RBI has asked state governments not to transfer their deposits out of private sector banks, saying apprehensions about the safety of deposits in private lenders are highly misplaced.
In a letter written to the chief secretaries of all states, the central bank said moving deposits out of private sector banks could have implications for banking and financial sector stability.