RBI steps into forex market to prop up ₹
MUMBAI: The Reserve Bank of India (RBI) has stepped into the currency markets with large dollops of liquidity to support the rupee, as the Covid-19 pandemic sends shock waves through global markets.
The central bank said in a statement on Thursday that it will conduct six-month US dollar sell-buy swaps worth $2 billion on March 16. This is expected to be the first of several such swap auctions.
“Financial markets worldwide are facing intense selling pressures on extreme risk aversion due to the spread of coronavirus infections, compounded by the slump in international crude prices and a decline in bond yields in advanced economies. Flight to safety has led to a spike in volatility across all asset classes, with several emerging market currencies experiencing downside pressures. Mismatches in US dollar liquidity have become accentuated across the world,” RBI said in a statement.
The central bank also assured that the current level of forex reserves at $487.24 billion remains “comfortable to meet any exigency.”
The pandemic has prompted global investors to seek safe-haven assets, with even foreign portfolio investors turning into net sellers in the Indian markets. The flight to safety has taken a toll on the Indian currency: On Thursday, the rupee hit 74.34 against the US dollar, approaching its all-time low of 74.48 seen in October 2018.
The Indian currency recovered marginally to close at 74.22 against the dollar.
Through this auction, RBI will sell US dollars totalling $2 billion at the current spot rate. In return, RBI will buy rupees from the participating banks. This supply of dollars is expected to quell the additional demand for dollars from FPIs liquidating their equity and bond positions.
The swap will be reversed in September 2020 when RBI will buy back the dollars at a premium determined by the auction. According to bankers, this auction is seen as a proactive step by the RBI as there is no dollar shortage in the system currently. They also added that the $2 billion auction may be the first of many more to come.
“There are signs of dollar shortage in the market. Banks’ foreign offices are not getting funds. There is massive discount sentiment and bankers are not willing to lend. The one-year forward premia bounced back after the announcement by RBI,” said the forex treasury dealer in a state-owned bank.