DR Ambedkar IAS Academy

Dollar Rupee Swap Facility

What is Dollar Rupee Swap 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.

The liquidity is provided to selected institutions (Category -I Authorised Dealers who are mainly commercial banks). Implication of the swap is that if the RBI sells dollar to the institutions today, they have to return the dollar at the end of the swap period. The opposite happens when the RBI buys dollar. One side of the transaction is Dollar whereas the other side is rupee. Depending upon whether RBI sells or buys foreign currency at the beginning of the swap, there are two types of Dollar-Rupee Swap:

  1. Dollar-Rupee Sell-Buy swap (RBI sells US $)
  2. Dollar-Rupee Buy-Sell swap (RBI buys US $)

At the end of the Sell-Buy swap period, banks returns dollars to the RBI to get the rupee. Here since, given the chance that the Rupee might have undergone a depreciation, (from say, Rs 74/$ to Rs 75/$), RBI has to give a premium (higher price for dollar) to banks. The amount of the premium will be decided in the auction of the swap facility.

Similarly, in the case of the Dollar-Rupee Buy Sell swap, the RBI will be buying dollar and at the end of the period, the RBI has to return the dollars to the banks. Here, the banks should give a premium to the RBI. This premium will be decided at the auction.

The Rupee-Dollar Swap may be either to sell dollars to banks or to sell rupee to banks. When the RBI sells dollars to banks, it will get rupee in return. On the other hand, when the  RBI sells Indian Rupee, it can get US Dollars from banks in exchange.

So, the Rupee-Dollar Swap can be in two forms:

(1) US Dollar/Rupee –Sell/Buy Swap: Here injection of US Dollar into the economy as the RBI sells US Dollars by recieving Rupee from participating banks.

(2) US Dollar/Rupee –Buy/Sell Swap: Here the RBI injects Rupee into banks by selling rupee while receiving US Dollars from the participating banks.

When RBI sells US Dollars, it will be indicated as US Dollar/Rupee -Sell/Buy Swap.

When RBI buys US Dollars, it will be indicated as US Dollar/Rupee -Buy/Sell Swap.

For example, the RBI conducted US Dollar/Rupee –Buy/Sell Swap during March 2019 to inject rupee liquidity into the banking system by buying US Dollars and exchanging rupee when it realised that banks are having shortage of Indian currency.

But on March 12, 2020, the RBI announced a US Dollar/Rupee –Sell/Buy Swap to by selling US Dollars to inject US Dollar into the fiancial system. The swap was conducted on March f16, 2020 in the background of the rupee falling to nearly Rs 74/$.