Why in news
- Indian banking system deposits reached record levels supported by foreign exchange swap facility inflows introduced by the central bank.
Key terms
Forex Swap
Agreement to exchange one currency for another at a specified rate with a commitment to swap back at a future date.
Balance of Payments
Systematic record of all economic transactions between residents of a country and the rest of the world.
Liquidity Adjustment Facility
Framework enabling commercial banks to borrow money from the RBI through repurchase agreements or deposit excess funds.
Capital Account
Component of the balance of payments that records international transactions in financial assets and liabilities.
What is a Forex Swap?
- Financial contract where the Reserve Bank of India buys foreign currency from banks in exchange for domestic currency with an agreement to reverse the transaction at a specified future date.
- Serves as a monetary policy instrument to inject durable rupee liquidity into the banking system without permanently increasing central bank foreign exchange reserves.
Impact on Banking System Liquidity
- Injected long-term rupee liquidity into domestic commercial banks, facilitating deposit expansion across the banking sector.
- Helped absorb surplus foreign dollar inflows and mitigated spot foreign exchange market volatility.
Prelims facts
- Forex swaps inject rupee liquidity into the banking system while absorbing foreign currency.
Mains discussion
- Role of central bank liquidity management tools in maintaining domestic financial stability during global capital flows.
Source: Business Standard
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