RBI | Dollar Swap
Dollar swap to help RBI manage balance sheet
Mumbai: The Reserve Bank of India’s $5 billion two-year sell/buy swap is a positive step in improving its position in multiple ways, according to analysts.
A report in Economic Times citing analysts said the move would help the central bank marginally reduce the size of its balance sheet, improve its dividend-paying capacity, and help manage liquidity and currency positions better.
The Reserve Bank of India (RBI) on Monday announced a US Dollar/Rupee two-year sell-buy swap auction in order to elongate the maturity profile of its forward book and smoothen the receivables relating to forward assets.
Reserve Bank said it will undertake a sell/buy swap auction of $5 billion on 8 March, which will enable the involvement of a wider set of market participants.
The auction will be multiple-price-based, i.e., successful bids will be accepted at their respective quoted premiums, RBI said in a statement.
A bank will purchase US Dollars from RBI and at the same time agree to sell the same amount of US Dollars at the end of the swap period.
As per the Bimal Jalan committee, RBI’s economic capital requirement is related to the size of assets and any drop in the balance sheet lowers the need for economic capital, or the resources needed to be set aside against potential risks.
Further, RBI also faces the challenge of fulfilling the dividend expectations this financial year as it needs its revaluation reserves to rise by about Rs 1 lakh crore to meet the capital norms prescribed by the Jalan Committee.
RBI had paid Rs 99,122 crore dividend to the government for July 2020-March 2021 period.
The Bimal Jalan Committee had made two key recommendations on RBI’s economic capital: the central bank should hold realized equity of between 5.5 percent and 6.5 percent of its assets, and, it should hold economic capital — across realized equity and revaluation reserves — of between 20.8 percent and 25.4 percent of its assets.
With the central bank’s active intervention in the market to cool the government bond yields and currency market actions, the RBI’s balance sheet has expanded by nearly Rs 6 lakh crore during FY22 to date, requiring an increase in the economic capital of around Rs 1 lakh crore.
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