Call Us Now

+91 9606900005 / 04

For Enquiry


Focus: GS-III Indian Economy

Why in news?

The Reserve Bank of India (RBI) has opened a six-month dollar sell-buy swap window to pump liquidity in the foreign exchange market — the first move following financial markets in India and across the globe experiencing turbulence over the spread of COVID-19, which could lead to a slowdown in growth.

What did the RBI say?

  • RBI said the financial markets worldwide are facing intense selling pressures on extreme risk aversion 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.
  • 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.

What is a Currency Swap?

  • A currency swap is an agreement in which two parties exchange the principal amount of a loan and the interest in one currency for the principal and interest in another currency.
  • At the inception of the swap, the equivalent principal amounts are exchanged at the spot rate.
  • Unlike an interest rate swap, the principal is not a notional amount, but it is exchanged along with interest obligations.
  • In a currency swap, the parties exchange interest and principal payments on debt denominated in different currencies.
  • Currency swaps can take place between countries.
  • The purpose of a currency swap is to hedge exposure to exchange rate risk or reduce the cost of borrowing a foreign currency.

How is this going to help?

It will help RBI in its efforts to fight market volatility.

The currency swap will provide liquidity to the foreign exchange market.

March 2024