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Our Bureau

Mumbai, Nov. 7 The Reserve Bank of India on Friday opened the liquidity tap for public and private sector banks that are facing problems funding their overseas operations due to the drying up of lines of credit from banks abroad and the freeze in overseas money markets.

The central bank said it would provide forex liquidity to the banks on request, until further notice, through forex swaps of tenors up to three months.

For funding the swaps, banks can also borrow under the Liquidity Adjustment Facility (LAF) for the corresponding tenor at the prevailing repo rate. Towards this end, the Reserve Bank of India will consider any specific relaxation of Statutory Liquidity Ratio (SLR) requirements.

The pricing of swaps would be based on the interest rates in the domestic as well as the overseas markets using the Reserve Bank reference rate for the dollar-rupee exchange rate.

A forex swap is the simultaneous purchase and sale, or vice versa, of identical amounts of one currency for another with two different value dates (normally spot to forward). The difference between the exchange rate applying initially and the rate at which the swap is reversed reflects the interest differentials between the two currencies concerned. Forex swaps can be used as a funding mechanism against short-term borrowings.

According to Mr Moses Harding, Executive Vice- President, IndusInd Bank, banks would need to weigh the costs involved in tapping the central bank via repo and forex swap vis-À-vis doing a buy-sell swap on their own in the market.

The announcement on forex swaps comes in response to the unfolding events relating to the global turmoil and its impact on international money markets. Central banks across the world have taken action to ease the liquidity situation through measures such as inter-central bank swap lines, collateralised lending and forex swaps.

“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, the Reserve Bank of India will provide forex liquidity to public and private sector banks having foreign branches or subsidiaries, through forex swaps of tenors up to three months,” the RBI said in a statement.

More Stories on : RBI & Other Central Banks | Forex

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