The Reserve Bank of India (RBI) will provide foreign exchange liquidity to foreign branches and subsidiaries of Indian banks through currency swaps. The central bank will also consider easing banks’ requirement to buy government debt in specific cases to free up cash to fund the currency swaps and will consider any specific relaxation of Statutory Liquidity Ratio (SLR) requirements for this purpose.

RBI will offer currency swaps maturing in up to three months. The swaps will be priced using domestic and overseas money-market rates and the dollar-rupee reference rate published daily by the central bank.

RBI said 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 response to the unfolding events relating to the global turmoil and its impact on international money markets.

Explaining the implications of the decision, a State Bank of India (SBI) official said banks that are unable to get credit from foreign banks can now tap the RBI window. This will help Indian banks with an overseas presence to tide over the liquidity crisis. The official, however, said SBI is not facing such problems because it has surplus dollars.

However, other bankers said the move is, at best, a temporary relief. Banks have to return the dollars to RBI in three months. This means they will have to either arrange another line of dollar credit or reduce the size of the overseas book, generating surplus dollars. “We will be back to square one in three months unless of course the liquidity situation overseas improves,” a banker said.

There is no mention of how much banks can draw under the swap facility, but RBI is likely to set bank-wise limits on drawals. The limit may be linked to the size of banks’ overseas books.

Apart from SBI, the other banks that have a sizeable overseas presence are Bank of Baroda, Bank of India, ICICI Bank and Axis Bank.

Owing to the financial crisis, Indian banks have changed their business strategies for overseas branches to protect them from any downside risks. In some cases, they have bought dollars in the domestic market and sent them to their overseas branches to meet business requirements.

source: Businessstandard

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