Business, Economy & Banking Current Affairs - 2019

Business, Economy and Banking in Current Affairs 2019 with latest news and current affairs in Agriculture, Industry, Banking, Capital Markets, Import and Export and Government schemes in commercial sector.

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RBI’s special dollar swap facility receives over $25 billion

According to Reserve Bank of India (RBI), over $25 billion has been collected from special concessional swap windows for deposits by non-resident Indians and overseas foreign currency borrowings by banks.

The swap windows for Foreign Currency Non-Resident (Bank) FCNR (B) deposits and overseas borrowings by banks was introduced by the central bank on September 4, 2013 after the rupee plunged about 30% against the dollar between April and August 2013. The facility is open till November 30, 2013. The special facility allows banks to swap fresh FCNR (B) dollar funds, mobilised for a minimum period of 3 years, at a fixed rate of 3.5% per annum.

The RBI also permitted banks to borrow up to 100% of their tier-I capital from overseas, which can be swapped with the central bank at a concessional rate of 100 basis points below the rate existing in the market.

What is Currency Swap?

currency swap is a foreign-exchange agreement between two institutions to exchange aspects (namely the principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency.

Currency swaps are over-the-counter derivatives, and are closely related to interest rate swaps. However, unlike interest rate swaps, currency swaps can involve the exchange of the principal.

What are the main uses of Currency Swap?

Currency swaps have two key uses:

  • To secure cheaper debt (by borrowing at the best available rate regardless of currency and then swapping for debt in desired currency using a back-to-back-loan).
  • To hedge against (reduce exposure to) exchange rate fluctuations.

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RBI to launch CPI-indexed IIBs

The Reserve Bank of India will launch CPI-indexed Inflation Indexed Bonds (IIBs) aimed at protecting the savings of retail investors from the impact of inflation by the end of December 2013.

According to RBI Deputy Governor H R Khan the amount of this year’s IIBs would be between Rs 10,000-15,000 crore (wholesale price and consumer price indexed bonds) but exact amount is yet to be decided.
In October, 2013, the RBI said in its policy statement that inflation-indexed securities for retail investors of 10-year tenor would be linked to the new (combined) Consumer Price Index (CPI). 

As per the statement, the interest would be compounded half-yearly and paid cumulatively at redemption.

What are Inflation-Indexed Bonds (IIBs)?

Inflation-Indexed Bonds or IIBs are bonds where both the principal and the interest are indexed to inflation. In this way it is different from the Capital Indexed Bonds (CIBs) issued in 1997 which provided inflation protection only to principal and not to interest payment. These are thus designed to cut out the inflation risk of an investment. These bonds will be linked to the inflation index of the country and serve as a better investment option as compared to physical assets like real estate and gold. Higher the inflation, the higher would be the returns.

Note: While the first series of IIBs which was open to all categories of investors was indexed to Wholesale Price Index (WPI), the second series which will be launched by December end this year will exclusively for retail investors and it will be indexed to the new (combined) Consumer Price Index (CPI).   

Why this step by RBI to launch Inflation Indexed Bonds (IIBs)?

The step is being taken to de-motivate investments in gold as bulging imports of the yellow metal has been adversely affecting the country’s Current Account Deficit (CAD), which had surged to a historic high of 6.7% in the third quarter of 2012-13. In May 2013, imports of gold and silver soared by 138% on an annual basis to $ 7.5 billion.

How would Inflation Indexed Bonds (IIBs) help?

As per RBI, IIBs would help in:

  • Boosting domestic savings and reversing the declining savings-to-GDP ratio.
  • Providing households and other investors a competitive option against gold and real estateIn the wake of rising inflation last year, there was considerable flow of investments from financial savings to safe-haven assets like gold that resulted into higher imports of the metal. This led to current account deficit or CAD widening to 4.9% of GDP at the end of September 2012.
  • Giving investors choice to use IIBs as good hedging instruments against inflation.

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