MUMBAI (Reuters) - The Reserve Bank of India has adequate dollar reserves and will conduct sell/buy swaps in the foreign exchange market to ensure adequate dollar liquidity amid the current global rout in markets, it said in a statement on Thursday.
Financial markets globally are facing intense selling pressures on extreme risk aversion due to the spread of coronavirus infections and have caused a mismatch in dollar liquidity across the world, the RBI said.
The RBI will conduct 6-month U.S. dollar sell/buy swaps to provide dollar liquidity to the foreign exchange market, with the first such swap for $2 billion to be held on March 16.
The Indian stock market plunged into bear territory on Thursday with the NSE Nifty 50 index plunging 8.3% to 9,590.15, its lowest close in 2-1/2 years. The rupee fell to a low of 74.35 per dollar, its lowest level since Oct. 11, 2018, the day it hit a life low of 74.4850. It closed at 74.23.
The RBI is closely and continuously monitoring the rapidly evolving global situation, the central bank said.
“It stands ready to take all necessary measures to ensure that the effects of the COVID-19 pandemic on the Indian economy are mitigated, and financial markets and institutions in India continue to function normally,” it said in the statement.
The country’s foreign exchange reserves - which stand at $487.24 billion as on March 6, 2020 - remain comfortably able to meet any exigency, it added.
The World Health Organization described the new coronavirus as a pandemic for the first time on Wednesday, adding that Italy and Iran were now on the frontline of the disease and other countries would soon join them.
Some market participants said the move - though not immediately necessary based on the current market situation - was helpful to calm nerves, while others hailed the move as a proactive measure to help prevent a massive run on the currency.
The central bank has also been spotted selling dollars in the spot foreign exchange market to prevent a sharp one-way move but traders believe it will be impossible to stop depreciation in the currency in the near term.
“The rupee has been falling last few days but is still better off compared to other Asian currencies as we have still not hit life lows,” a senior trader with a foreign bank said.
“RBI supplying dollars via the sell/buy swap helps RBI avoid massive intervention in the spot market while it also gives the market some form of assurance that their dollar liquidity needs would be met, thus avoiding any panic buying,” he added.
Reporting by Swati Bhat; Editing by Frances Kerry