RBI to help banks meet dollar shortage

The Reserve Bank of India (RBI) has stepped in to help foreign operations of Indian banks tide over shortage of dollar liquidity caused by the global credit squeeze, reports Rajendra M Palande.

The Reserve Bank of India (RBI) has stepped in to help foreign operations of Indian banks tide over shortage of dollar liquidity caused by the global credit squeeze.

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The RBI will provide foreign currency to banks like State Bank of India (SBI), ICICI Bank, Bank of India (BoI), Bank of Baroda (BoB) and Axis Bank on request for a period of three months.

The foreign currency would be provided to banks through foreign exchange swaps of tenors up to three months. A foreign exchange swap involves exchange of principal and interest in one currency for another currency.

The RBI said “in the context of the global developments and in order to provide flexibility to Indian banks in managing their short-term funding requirements at their overseas offices, it will provide forex liquidity to Indian public and private sector banks having foreign branches or subsidiaries.”

This foreign currency liquidity facility will be available on request until further notice. The pricing of swaps will be based on the interest rates in the domestic as well as the overseas markets using the Reserve Bank reference rate for the USD-INR exchange rate.”

Rupee liquidity of around Rs 2,80,000 crore has been injected into or made available to the banking system, in the last one month, through reduction in the proportion of deposits banks are requird to hold as cash reserves, a cut in the amount of deposits banks are required to invest in government bonds and making available liquidity against deposit of government bonds.