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The Reserve Bank of India (RBI) announced a US Dollar/Rupee two-year sell-buy swap auction for elongating the maturity profile of the forward book and smoothening the receivables relating to the forward assets.
The RBI will undertake a sell-buy swap auction of USD 5 billion, which would help it improve its dividend-paying capacity, marginally reduce the size of its balance sheet and help currency positions and manage liquidity better. The auction will be multiple prices based, i.e., successful bids would be accepted at their respective quoted premiums.
As per the Bimal Jalan Committee, there is a linkage of RBI’s economic capital requirement to the size of the assets. Thus, any reduction in the balance sheet would reduce the need for economic capital or resources required to be set aside against the possible risks.
The RBI faces an uphill task of meeting the dividend expectations of this fiscal year as it requires its revaluation reserves to rise by around Rs.1 lakh crore for meeting the prescribed capital norms of the Jalan Committee.
The RBI had paid the Rs.99,122 crore dividend to the government for July 2020 to March 2021. The Bimal Jalan Committee made two critical recommendations after looking into the RBI’s economic capital. The recommendations were that the central bank should hold realised equity of between 5.5% and 6.5% of its assets and should hold economic capital (across realised equity and revaluation reserves) of between 20.8% and 25.4% of its assets.
The RBI’s balance sheet has expanded by around Rs.6 lakh crore through FY22 due to the market’s active intervention to cool the government bond yields and currency market actions, requiring an increase in the economic capital of around Rs.1 crore.
The swap operations may help RBI in its balance sheet management. It would also help manage the domestic liquidity that has been in surplus at more than Rs.9 lakh crore and prepare for a surge in inflows of dollars when the LIC Initial Public Offering (IPO) hits the market in March.
For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@cleartax.in
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