To expedite rate transmission for the end consumer to be very much in line with the policy rates, the apex bank in its latest move has decided to pump in $5 billion via the foreign exchange reserve swap. The decision on a broader basis will help improve the liquidity condition in the market and from the consumer's perspective will likely reduce borrowing cost.
As per the foreign exchange reserve swap deal, the Reserve Bank of India via auction for 3 years on March 2019 will purchase up to $5 billion from the market. Also, the similar amount will be sold back to the respective parties in March 2022.
It is to be noted that as the policy rate cut of 25 basis points in the RBI's recent bi-monthly monetary policy meet on February 7 was largely doubted due to policy transmission to public at large. Also, accordingly RBI governor convened a meet with the chief executives of PSBs to discuss issues concerning policy transmission.
The move will bring down the interest rates in the economy, which will likely provide some momentum to private investments that remained very weak for years. Also, a sharp fall in the exchange rate will be prevented with the increase in foreign fund inflows.
As an immediate impact, it was seen that rupee depreciated to 69.68 against the dollar. Also, the one-year dollar or rupee forward premium decreased from 3.89 to 3.633.
The RBI in respect of the deal said that the amount of dollars mobilised via the foreign exchange swap will reflect in the apex bank's foreign exchange reserves for the swap tenure while also reflecting in RBI's forward liabilities.