EDEN IAS UPSC Current Affairs – RBI Foreign Exchange swap To improve domestic liquidity conditions, the Reserve Bank of India has decided to conduct a long-term forex swap auction. What is it? The RBI has different tools through which it injects liquidity into financial markets. Adjusting repo rates and purchasing bonds by conducting open market operations (OMO) are a couple of tools which the RBI uses regularly either to increase or decrease the currency supply in the market. The recently announced ‘swap auction’ is one such tool. This is being done to increase the supply of rupees in the market. Technically, this activity is being termed as a USD/INR Buy/Sell Swap Auction. Through this auction, the RBI will buy US dollars from banks totalling to $5 billion. In turn the RBI will pay rupees to the participating banks at the current spot rate. Simultaneously, the banks will agree to buy-back the same amount of dollars from the RBI after three years — the tenor of this auction. The participating banks have to bid in the auction by quoting a forward premium in terms of paisa that they will pay to buy back the dollars. For example, if the spot exchange rate is 70 to a dollar, say Bank A quotes a premium of 150 paisa and bids for $25 million. So, the bank will get Rs. 175 crore ($25 million multiplied by the exchange rate of 70). After three years, the bank has to pay back approximately Rs. 179 crore ($25 million multiplied by the exchange rate of 71.5) to the RBI to buy back $25 million. Forex Swap Forex swap is different from currency swap where two parties exchange a notional principal with one another in order to gain exposure to a desired currency. Forex swaps and other types of foreign exchange operations are also open market operations. OMO is a direct instrument of monetary policy, because the instrument influences the money supply directly. RBI uses Open Market Operations along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system. On the other hand, in swap transaction, only authorised dealers, mainly banks, will be allowed to deposit US dollars in exchange for rupees. Under the current swap auction, RBI will buy US dollars from banks totalling to $5 billion. Minimum bid size would be $25 million and in multiples of $1 million thereafter. https://www.edenias.com/eden-ias-upsc-current-affairs-rbi-foreign-exchange-swap/ UPSC Current Affairs for IAS Mains 2019.