B. K. Goenka, President of The Associated Chambers of Commerce and Industry of India (ASSOCHAM) analyses the Dollar-Rupee situation in detail
Even though the debate over impact of the surprising new tool, used by the RBI Governor Shaktikanta Das, refuses to die down, we, at ASSOCHAM, feel that RBI’s three year dollar-rupee swap is one more tool to inject liquidity instead of the traditional open-market purchase of bonds. With the help of this mechanism, the Reserve Bank of India (RBI) will infuse around $5 billion into the Indian banking system. There is overall skepticism about the move as it makes its maiden entry in Indian system about its impact on money and forex markets.
We believe that the apex bank has long-term, sustainable infusion of liquidity in mind through this step. This move will not only help to improve liquidity into the economy but also will help to strengthen dollar reserves and create opportunity for banks to earn interest out of the forex reserves lying idle in their kitty and lower private borrowing costs as well. The conventional mode of injecting sustainable cash in the system by Open Market Operation (OMO), in which RBI buys bonds from the banks or system and injects liquidity, comes with its risk of depleting banks’ bond reserves for its repo operation and fulfilling regulatory commitment if the apex bank overdoes it.
As per available figures in reports, India’s apex bank has already pumped in $42 billion in to the banking system in this financial year by buying approximately 70 percent of net government bond issuance. So, it has natural aversion to it. Also, RBI buying government bonds in large amount may affect the overall yields, on which the entire loan interest rates are benchmarked for various tenure. The short-term bond yield may be lower after this move. However, for the long-term yields, it would be ‘wait and watch’ for a while. The silver lining to all things said and done is it may spruce up the sluggish government bond demand.
According to another school of thought, the RBI will buy $5 billion from banks for its reserve against rupee and then auction it back to them in 2022, which would prevent Indian currency from appreciating further. With the new tool in hand the RBI may be able to tighten its fists on overall situation. The move will also have an implication on forward premium and Interbank Forward Offer Rate (MIFOR) as after three-year maturity the central bank will be the receiver of forward premium pushing the fall in the FX swap rates. That would make it easier for the banks and corporate to raise funds offshore and swap it with cheaper rupee. The economy, which is already sluggish in sectors like MSME and real estate that heavily bank on non-banking finances with a higher funding cost – may get some breather with this infusion as they will have access to more funds at lower costs.
