The RBI has different tools through which it injects liquidity into financial markets. Recently on 12 March 2020 Reserve Bank of India (RBI) announces sell-buy swap, for 6 months which means the central bank will sell dollars in the market now and buy them back six months down the line to increase the supply of rupees in the market.
Financial markets worldwide are facing intense selling pressures on extreme risk aversion due to the spread of corona virus (COVID 19) 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 US dollar liquidity have become accentuated across the world,” RBI said in a statement.
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. The auctions will be multiple price based, i.e., successful bids will be accepted at their respective quoted premiums,”
To begin with, an amount of $2 billion would be offered on March 16, 2020.
The RBI also said it is closely and continuously monitoring the rapidly evolving global situation and spillovers. “It stands ready to take all necessary measures to ensure that the effects of the corona-virus (COVID 19) pandemic on the Indian economy are mitigated and financial markets and institutions in India continue to function normally. The level of forex reserves at $487.24 billion as on March 6, 2020 remains comfortable to meet any exigency.”
