Dollar Rupee Swap Auction is a tool of foreign exchange by which the central bank uses its currency to buy another currency or vice versa.

Dollar Rupee Swap Auction Facility The Dollar-Rupee swap facility is a liquidity facility by the RBI where the central bank provides either dollar liquidity or rupee liquidity by accepting the opposite currency.

It can reduce the pressure on inflation and strengthen the rupee. Dollar-Rupee Buy/Sell Swap, When the central bank buys dollars (US dollars or USD) from banks in exchange for Indian Rupees (INR) and immediately gets into an opposite deal with banks promising to sell dollars at a later date.

Dollar-Rupee Sell/Buy Swap: When the central bank sells USD in exchange for INR and promises to buy dollar from banks after some years. Dollar inflow into the market will strengthen the rupee
which has already hit the 77 level against the US dollar.

These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.

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What is the RBI Planning to do?

The RBI sold USD 5.135 billion to banks and simultaneously agreed to buy back the dollars at the end of the swap settlement period.

The intent here is that the central bank acquires dollars from the seller, charging the lowest premium possible for the two-year tenor. Accordingly, banks that bid at the lower range of the auction are successful at the auction. Assuming a dollar rate of Rs 75, the system liquidity will shrink by Rs 37,500 crore.

Impact of Dollar-Rupee Swap Auction

The major impact will be that liquidity which currently averages around Rs 7.6 lakh crore will shrink, Dollar inflow into the market will strengthen the rupee.

The RBI normally brings down liquidity in the system when inflation threatens to rise sharply. Inflation gets to its peak due to the factors, Oill price hike, The outflow of Institutional Investments.

What is the Liquidity Management Initiative?

It is defined as the framework or a set of rules followed by the central bank in steering the number of bank reserves in order to control their price consistently with its ultimate goals.

Various instruments under this framework are Repo/Reverse Repo Auction, Marginal Standing Facility (MSF), Forex Swaps.