Move over Greenspan/Bernanke/Powell Put, time to look at Das Put?

Mint op-ed piece today:

A $5-billion, three-year dollar-rupee swap by the central bank with commercial banks to primarily increase “durable” liquidity in the system is bound to have multiple ripple effects. The first obvious outcome will be a definite increase in liquidity when RBI buys dollars and releases rupees in the market. Second, the surge of liquidity, combined with a downward pressure on premiums for near-term forward contracts, will influence interest rates in the economy. Third, RBI has often expressed its concern over rupee-dollar trades moving to the non-deliverable forward markets of Singapore, Dubai and London. This swap might draw some of that activity back to local markets. Fourth, the appreciation of the rupee since the forex swap announcement on 13 March—over 1% till 22 March—seems to indicate that India’s central bank now has a higher tolerance level for its rise against the dollar.

Despite these certain outcomes, the governor’s actions can be viewed through different lenses. In some ways, his adoption of this curious liquidity tool to increase systemic liquidity can also be seen as his way of ensuring that Indian markets do not search for new bottoms.

Till market closing on 22 March, the BSE Sensex had gained 1.7% since the swap was declared. Comparisons are being made with a market strategy adopted when Alan Greenspan was chairman of the US Federal Reserve, which came to be known as the “Greenspan put”; in simple words, players expected the Fed to intervene by easing its monetary policy every time markets hit a speed-breaker. This pretty much continued till the financial crisis erupted and forced a rethink of the Fed’s dominant tenets.

Scheduled this week, RBI’s swap will have one obvious outcome: higher dollar inflows as lower hedging costs encourage Indian companies to borrow more overseas and foreign portfolio investors find rising returns from rupee assets.

Too early to say whether there is Das Put or not. But then central bankers have pretty much boxed themselves into these put options. One is always pressurised to do something when financial markets begin to decline significantly….

One Response to “Move over Greenspan/Bernanke/Powell Put, time to look at Das Put?”

  1. Anantha Nageswaran Says:

    The logic of this op.-Ed., is flawed and the analogy is wrong.

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