Is RBI’s dollar-rupee swap a good idea?
The Reserve Bank of India came up with a decision to resort to a
dollar-rupee swap. The RBI will purchase $5 billion from banks in exchange for
rupees. For the banks, it is
a way to earn some interest out of the forex reserves lying idle in their
kitty. The move will have implications for the currency market even as it helps
shore up the RBI’s dollar reserves.
The rupee’s recent rally against the dollar has been halted by the RBI’s
decision to infuse rupees and suck out dollars through the swap scheme. Even
so, it is worth noting that the rupee has appreciated significantly in value
terms against the dollar since the low reached in October as foreign investors
have begun to pour money into the Indian economy.
The dollar-rupee swap is a useful addition to the RBI’s policy toolkit as
it offers the central bank a chance to directly influence both the value of the
rupee and the amount of liquidity in the economy. It can be an effective way to
lower private borrowing costs as well. The coming elections, which can lead to
an increase in cash withdrawals from banks, may have also played a role in the
RBI’s larger decision to boost liquidity in the system. Businesses could
benefit from the greater availability of liquidity,
Both RBI and Government of India still continue to work on the
"Window dressing" formulas, instead of aiming for creating conditions
for Investment inflow into Business/Industry that help Value Addition. This has
been India's problem for almost five years now. Unless India attracts
investments on Productive systems adding Value to Local resources, thereby
generating more Jobs, any "money manipulation" and arithmetic
jingoism in terms of Dollar-Rupee swap etc - cannot help. We may end up in
bigger fiasco.
India keeps saying that we should move away from U.S. dollar hegemony and
adopt multi currency standards, such as Euro, Japanese Yen and Chinese Yuan.
But RBI (and India) repeatedly goes after the USD. Some people ask, “Why not do
a Euro-Rupee swap or a ChineseYuan-Rupee swap, instead of the almighty dollar?”
But US has more takers in India.
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