*24th Feb, 2025* *News of the Day* *What is the RBI’s Buy-Sell Swap?* *Introduction* The Reserve Bank of India (RBI) is conducting a foreign exchange swap to manage liquidity (availability of cash in the economy) and stabilize the Indian rupee. This means that RBI will temporarily buy US dollars from banks and later sell them back at a fixed future date. This move helps: 1. Boost liquidity – Ensuring banks have enough rupees to lend and invest. 2. Control volatility – Keeping the rupee’s exchange rate stable. 3. Increase forex reserves – Strengthening India's financial position by holding more US dollars. *How Does the Swap Work?* *1. First Leg (Buy Dollars, Release Rupees)* • Banks sell US dollars to RBI through an auction (competitive bidding process). • RBI pays rupees to these banks by crediting their accounts. • Banks transfer dollars to RBI’s nostro account (foreign currency account held by RBI in overseas banks). • Release of rupees in the market enhances liquidity and buying of dollars increase the forex reserves with RBI. *2. Second Leg (Return Rupees, Get Dollars Back)* • At the end of the swap period (a fixed time, like 3 or 6 months), banks buy back their US dollars. • Banks return the rupees they got earlier, along with a swap premium (a small extra cost, like interest). • RBI gives back the dollars to the banks. *Key Terms Explained* • Liquidity – The availability of money in the financial system. More liquidity means banks can lend easily. • Volatility – Rapid price or currency movement. The swap helps stabilize the rupee’s value. • Forex Reserves – Foreign currencies held by RBI, mainly in US dollars. • Nostro Account – An account that RBI holds in a foreign bank, used for international transactions. • Swap Premium – The extra amount banks pay to RBI when they buy back dollars (similar to interest on a loan). This mechanism helps RBI manage liquidity, stabilize the rupee, and strengthen forex reserves without directly buying or selling dollars in the open market. Relevance: GS Prelims; Economics Source: The Hindu and Indian Express *Download the Complete Daily Current Affairs Pdf* https://www.prepmate.in/wp-content/uploads/2025/02/News-Juice-24th-February-2025.pdf