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Long-term foreign exchange buy/sell swap
a) The Reserve Bank of India (RBI) has decided to inject rupee liquidity into the system through long-term foreign exchange buy/sell swap.
b) This is a first-of-its-kind instrument used for liquidity management.
c) The RBI would conduct dollar-rupee buy/sell swap auction of $5 billion for a three-year tenor.
d) This is to meet the durable liquidity needs of the system
e) The Reserve Bank has decided to augment its liquidity management toolkit and inject rupee liquidity for longer duration.
f) This is to lower the dependence on open market operations(OMOs) which have been a significant amount of the overall borrowing.
g) Higher OMOs can distort the rates curve.
h) The move would boost RBI’s foreign exchange reserves.
i) The U.S. dollar amount mobilised through this auction would also reflect in RBI’s foreign exchange reserves for the tenor of the swap and also in RBI’s forward liabilities.
j) Market participants would be required to place their bids in terms of the premium that they were willing to pay to the RBI for the tenor of the swap.
k) The auction cut-off would be based on the premium and the auction would be a multiple-price based auction.
Source: The Hindu