RBI offers $2 bn swap to soothe forex market
■ Says ready to take all step to counter Covid-19 impact
With bloodbath across the globe getting mirrored in the domestic financial market, the Reserve Bank of India (RBI) on Thursday stepped in to soothe nervous investors, stating that it is 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 also announced a six month US dollar sell/buy swaps to address the shortage of dollars. The central bank plans to offer $2 billion to the forex market on March 16. A bank shall buy US dollars from the RBI and simultaneously agree to sell the same amount of US dollars at the end of the swap period.
“Financial markets worldwide are facing intense selling pressures on extreme risk aversion due to the spread of Covid19 infections, compounded by the slump in international crude prices and a decline in bond yields in advanced economies. Flight to safety has led to spike in volatility across all asset classes, with several emerging market currencies experiencing downside pressures. Mismatches in dollar liquidity have become accentuated across the world,” said the RBI.
“On a review of current financial market conditions and taking into consideration the requirement of US Dollars in the market, it has been decided to undertake 6-month US dollar sell/buy swaps to provide liquidity to the foreign exchange market. The swaps will be conducted through the auction route in multiple tranches,” said the RBI adding that the level of forex reserves at $487.24 billion as on March 6, 2020 remains comfortable to meet any exigency.
Indian equity, bond and currency markets have witnessed their worst day as foreign investors cut their exposure to them. Foreign investors have sold Rs 33,164 crore in local debt and equity since the start of March, according to data from the National Securities Depository Ltd.
However, forex traders ruled out a shortage of dollars as forward premium has remained steady at 3.75 to 4 per cent for the last three months but the RBI move was pre-emptive.
Harihar Krishnamoorthy, treasurer at FirstRand Bank, explained, “The move must have been triggered by an understanding that there is a liquidity shortage of dollars despite the fall in US interest rates. So the RBI has opened the window which would supplement the interbank supply in the over the counter market. The advantage of doing this is that a large amount of dollars can be infused by the RBI through a bank at a single price without disrupting the market.”
After opening sharply higher by 61 paise at 74.24, the dollar-rupee pair traded in a narrow range of 24 paise (74.09-74.33). Global risk-off sentiment amid continued worries over the economic impact from the coronavirus virus have weighed on the riskier assets, including the Asian currencies, which are down nearly one per cent against the dollar as the yuan weakened past the 7mark. India's 10-year bond yield rose by 11bps at 6.23 per cent.
India's current account deficit narrowed sharply to $1.4 billion in October to December 2019 from $ 17.7 billion in the same period last year. The sharp contraction in the deficit was mainly due to a lower trade deficit of $34.6 billion.