Fighting CoronavirusApprox Read Time: 5 minutes
- In order to mitigate the effects of the Covid-19 pandemic on the Indian economy, RBI has announced a rupee-dollar swap auction and long-term rupee repo operations (LTRO), which will meet dollar demands of the industry and inject more liquidity in the domestic market, respectively.
- It is being estimated that due to the COVID-19 pandemic, there will be consequent loss of global growth are currently placed in the range of 0.4% to 1.5%.
- COVID-19 has also impacted many sectors in India, thus distorting the growth of the economy.
- 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, RBI has taken special measures, which include:
- Reserve Bank of India has announced a Rs 1-lakh-crore liquidity infusion for banks through a long-term repo operation (LTRO) at the central bank’s policy rate of 5.15%.
- It also announced a second six-month dollar-swap facility, under which, the central bank will make available $2 billion to the forex markets for six months.
- The Reserve Bank of India also indicated the possibility of a policy rate cut even before the scheduled review of monetary policy.
- The RBI decision to ensure additional liquidity through LTRO and swap transactions will ensure the twin objectives of further compression in term structure of interest rates and ensuring dollar liquidity.
What is LTRO?
- LTRO is a tool in which central bank offers money to banks for a period of one to three years at the prevailing repo rate (currently at 5.15%).
- The banks in turn offer government securities with same or higher tenure as a collateral to the central bank.
- To improve transmission of rate cuts, the RBI introduced LTRO in February, 2020.
- In the LTRO system, RBI believes that offering banks durable longer-term liquidity at the repo rate can help them lower the rates they charge on retail and industrial loans, while maintaining their margins.
- These efforts are being carried forward with a view to assuring banks about the availability of durable liquidity at reasonable cost relative to prevailing market conditions.
- This should encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors.
What is the dollar-swap window by the RBI all about?
- RBI will provide $2 billion on March 23 to any bank which wants through a swap.
- Therefore, the RBI will give dollars and the buyer gives rupees and the transaction will be reversed on September 23.
- Thus, it a 6-month sell-buy swap from RBI.
How does dollar-swap help?
- It helps those banks that have seen a big outflow of dollars as foreign funds sell their shares, and with the rupees buy dollars to exit the country.
- Since there is excessive dollar buying by FPIs, RBI is replenishing the market with dollars.