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RBI OPENS DOLLAR-SWAP WINDOW

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.




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December 2022
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