DNA Money Edit: How $-Re swap auction infused Rs 35,000 crore
The central bank agreed to buy back dollars from large banks provided they agree to buy it back at a pre-determined price agreed by both the parties.
Reserve Bank of India (RBI) created a buzz in the banking circles on Tuesday by infusing Rs 34,561 crore into the banking system in exchange for dollars, in the dollar-rupee swap auction. The central bank agreed to buy back dollars from large banks provided they agree to buy it back at a pre-determined price agreed by both the parties. The banks have to bid in the auction by quoting a forward premium. RBI bought back dollars from banks at the average spot rate of Rs 70 per dollar at a premium of Rs 7.76. The auction was so successful that the central bank received $16.31 billion, nearly three times the notified amount.
The swap auction helps infuse immediate liquidity in the market instead of resorting to Open Market Operations (OMOs), when RBI buys government bonds from banks to release money into the banking system. The timing of the auction will help take care of the huge credit demand in the fourth quarter and also the cash expenses that the elections will entail. It will also enhance the forex reserves of the country besides providing financial support for various sectors of the economy. The auction will also ease the liquidity crunch in the market prevailing since the IL&FS crisis. The hedging cost for the importers is also likely to fall with the auction improving the domestic rupee liquidity.