Topic Of The Day:-“ Dollar-Rupee Swap, A Useful Tool”
The dollar-rupee swap allows the RBI to directly influence rupee value and liquidity
The Reserve Bank of India’s decision last week to resort to a dollar-rupee swap, instead of the traditional open-market purchase of bonds, to infuse liquidity into the economy marks a significant shift in the central bank’s liquidity management policy. Under the three-year currency swap scheme, which is scheduled to open on Tuesday next week, the RBI will purchase $5 billion from banks in exchange for rupees. The central bank will infuse as much as ₹35,000 crore into the system in one shot at a time when liquidity generally tends to be squeezed. For the banks, it is a way to earn some interest out of the forex reserves lying idle in their kitty. Apart from injecting fresh liquidity into the economy, the move will have implications for the currency market even as it helps shore up the RBI’s dollar reserves. Bond yields rose on the day following the announcement of the swap scheme last week, reflecting the prevailing opinion among traders that the RBI may gradually reduce its dependence on the regular bond purchase scheme to manage liquidity within the economy. While traditional open market operations distortthe bond market, the new forex swap scheme will introduce new distortions in the currency market. The rupee’s recent rally against the dollar has been halted by the RBI’s decision to infuse rupees and suck out dollars through the swap scheme. Even so, it is worth noting that the rupee has appreciated significantly in value terms against the dollar since the low reached in October as foreign investors have begun to pour money into the Indian economy.
Overall, the dollar-rupee swap is a useful addition to the RBI’s policy toolkit as it offers the central bank a chance to directly influence both the value of the rupee and the amount of liquidity in the economy at the same time using a single tool. In the aftermath of the liquidity crisis in the non-banking financial sector, it can be an effective way to lower private borrowing costs as well. The coming elections, which can lead to an increase in cash withdrawals from banks, may have also played a role in the RBI’s larger decision to boost liquidity in the system. The way banks respond after receiving fresh liquidity from the RBI, however, will determine the success of the new liquidity scheme to a large extent. Businesses could benefit from the greater availability of liquidity, but only if banks aggressively pass on the benefit of lower rates to their borrowers. If banks choose to deposit the fresh RBI money in safe government securities at low yields, as they have done in the past, the de facto cap on the government’s borrowing costs will remain intact. But if banks manage to find alternative ways to deploy their money, the RBI’s new liquidity scheme could end up raising borrowing costs for the government, punishing it for fiscal indiscretion.
WORDS AND MEANINGS:-
1) infuse
Meaning: fill; pervade.
Synonyms: impart
Antonyms: discourage
Example: “her work is infused with an anger born of pain and oppression”
2) implications
Meaning: the conclusion that can be drawn from something although it is not explicitly stated.
Synonyms: connotation
Antonyms: proof
Example : “the implication is that no one person at the bank is responsible”
3) prevailing
Meaning: existing at a particular time; current.
Synonyms: uncommon
Antonyms: predominant
Example: “the unfavourable prevailing economic conditions”
4) distort
Meaning: pull or twist out of shape.
Synonyms: disfigure
Antonyms: preserve
Example: “a grimace distorted her mouth”
5) aftermath
Meaning: the consequences or after-effects of a significant unpleasant event.
Synonyms: impact
Antonyms: source
Example: “food prices soared in the aftermath of the drought”
6) indiscretion
Meaning: behaviour or speech that is indiscreet or displays a lack of good judgement.
Synonyms: miscue
Antonyms: correction
Example: “he knew himself all too prone to indiscretion”
7) deploy
Meaning: move (troops or equipment) into position for military action.
Synonyms: expand
Antonyms: conclude
Example: “forces were deployed at strategic locations”
