Context:
RBI plans $10 billion dollar-Re swap to improve liquidity.
Currency Swap Arrangement (CSA):
- A contract under which 2 counterparties agree to exchange two currencies at a set rate and then to re-exchange those currencies at an agreed upon rate at a fixed date in future.
- Objectives of CSA –
- To meet short term foreign exchange liquidity requirements
- To ensure adequate foreign currency to avoid Balance of Payments (BOP) crisis till longer arrangements can be made.
- Buy/Sell Swap –
- Buy Phase – RBI buys US dollars from banks in exchange for Indian Rupees.
- Effect – Increases the Rupee liquidity in the banking system. S
- Sell Phase – After a specified period, the RBI sells the same amount of US dollars back to the banks and receives the Indian Rupees in return.
- Buy Phase – RBI buys US dollars from banks in exchange for Indian Rupees.
Other Significant CSAs of India:
- BRICS Contingent Reserve Agreement signed in 2015.
- India-Japan bilateral CSA
- India-UAE CSA
- India-Sri Lanka CSA
Read more about RBI’s Liquidity Measures
Source: TOI
Previous Year Question
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
[UPSC Civil Service Exam – 2020 Prelims]
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b)