The Reserve Bank of India (RBI) has undertaken rupee-dollar swaps with commercial banks mobilising fresh funds under the foreign currency non-resident (banks) deposits and overseas borrowings. They will strengthen its forex reserves. But if the banks swap dollars with the RBI, it would lead to a reduction in their supply in the market causing a depreciation of the rupee. The swap would be counterproductive if intervention is undertaken. The release of rupee has an implication for money supply. The RBI will have to moderate its Open Market Operations accordingly. The RBI governor has indicated transparency and predictability as his watchwords. So, the RBI should announce the exchange rates used in the swaps, including the ones with oil marketing companies. It will have a salutary impact on the market rate. It should consider removing the remaining restrictions on interest rates on non-resident Indian deposits. It should also encourage commercial banks to issue forex loans on internationally competitive terms to corporations from out of their forex deposits by opening a limited refinance window, if found feasible.
A Seshan, Mumbai
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