RBI to offer USD 2 billion worth American dollars to soothe forex market

Mumbai: The Reserve Bank on thursday announced measures to infuse liquidity in the foreign exchange market, including the US dollar swaps worth USD 2 billion, as markets crashed amid mounting concerns over coronavirus pandemic.

The first buy/sell swap auction will take place on monday.

“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 six-month US Dollar sell/buy swaps to provide liquidity to the foreign exchange market,” the central bank said in a statement.

The swaps will be conducted through the auction route in multiple tranches. The auctions will be multiple price.

“To begin with, an amount of USD 2 billion would be offered on March 16,” it said.

Under the swaps, banks will buy US dollars from the RBI and simultaneously agree to sell the same amount of the American currency at the end of the swap period.

The RBI said financial markets worldwide are facing intense selling pressures on extreme risk aversion due to the spread of 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 a spike in volatility across all asset classes, with several emerging market currencies experiencing downside pressures. Mismatches in the US dollar liquidity have become accentuated across the world.

According to the market data, foreign investors have withdrawn more than Rs 21,000 crore this month from Indian capital markets so far amid growing concerns over the virus hitting the global economy.

The RBI noted that “forex reserves of USD 487.24 billion as on March 6, 2020 are comfortable to meet any exigency”.