The Reserve Bank will sell USD 2 billion worth of American currency to banks in a bid to infuse liquidity in the domestic forex market roiled by mounting concerns over coronavirus pandemic and crash in global oil prices. The central bank also stressed it is closely and continuously monitoring the rapidly evolving global situation and spillovers. Also, it stands ready to take all necessary measures to ensure that the effects of the COVID-19 pandemic on the Indian economy are mitigated, and financial markets and institutions in India continue to function normally.
The level of forex reserves at USD 487.24 billion as on March 6, 2020, remains comfortable to meet any exigency, the central bank added. As part of its efforts to soothe the forex market, the RBI will undertake 6-month US Dollar sell/buy swaps. The swaps will be conducted through the auction route in multiple tranches. The auctions will be multiple prices based -- successful bids will be accepted at their respective quoted premiums.
"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 6-month US Dollar sell/buy swaps to provide liquidity to the foreign exchange market," the RBI said in a statement. In the first tranche, the RBI will sell American dollars worth USD 2 billion on Monday.
The swap will be in the nature of a simple sell/buy foreign exchange swap from the Reserve Bank side.A bank will buy US Dollars from the RBI and simultaneously agree to sell the same amount of US Dollars at the end of the swap period. 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," the RBI said. Mismatches in US dollar liquidity have become accentuated across the world. The RBI also said the minimum bid size for the swaps auction will be USD 10 million and in multiples of USD 1 million thereafter.
The benchmark BSE Sensex plunged over 2,919 points, its biggest one-day fall in absolute terms. The Indian rupee plunged to a 17-month low of 74.24 against the US dollar due to heavy dollar demand.
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