What is meant by Foreign Exchange swap? Discuss its impact in the Indian Economy. (150 Words)
Refer - Business Line
Enrich the answer from other sources, if the question demands.
IAS Parliament 5 years
KEY POINTS
· Forex swap, refers to conduction of an auction by RBI that will see banks selling dollars to the RBI in exchange of rupees.
· An FX swap allows sums of a certain currency to be used to fund charges designated in another currency without acquiring foreign exchange risk.
Impact in the Indian Economy
· During the time of election which is known to pull out currency from the market, forex swap from the RBI may help partly bridge the liquidity deficit in market.
· If the auction is successful, it is expected to immediately release $5 billion worth of rupee liquidity into the banking system, thus cooling short-term bond yields.
· The auction will immediately shore up RBI’s foreign exchange reserves by $5 billion.
· Banks which are currently short on SLR securities and cannot participate in OMOs, will receive liquidity infusions too.
· The swap deal may temporarily bring down hedging costs in the domestic market, helping local firms with foreign exchange exposures hedge their open trade or loan exposures.
· The forex swap, like OMOs, essentially puts more money in the hands of banks, who in turn have discretion to decide whether to step up credit to lower-rated borrowers.
