INDIA’S central bank injected US$5.10 billion through a foreign-exchange swap auction, using the tool for the first time in five years to ease a severe cash crunch plaguing the financial system.
The infusion takes the amount poured into India’s banking system to US$7.3 billion in the past two days and is part of the Reserve Bank of India’s (RBI) broader US$18 billion plan to address the tightness in domestic money markets.
The cash crunch has been caused partly by the central bank’s intervention in the foreign exchange market and tax outflows. That pushed the liquidity deficit to its highest in over a decade and threatens economic growth.
The RBI drew bids worth US$25.59 billion at the USD/INR buy-sell swap auction, five times more than the RBI offered to buy.
The swap entails the central bank purchasing US dollars from banks against the rupee while contracting to sell the greenback at a future date. When the central bank buys US dollars, it injects an equivalent quantum of rupee liquidity.
“The kind of large demand that we saw for the auction clearly shows the demand for liquidity in the system,” said Anindya Banerjee, currency analyst, Kotak Securities.
The RBI bought 200 billion rupees of bonds on Jan 30 and intends to add more cash via long-term repo operations. BLOOMBERG
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