RBI assures it will use forex power to douse market fire

Assuaging frayed nerves of investors, the Reserve Bank of India Thursday assured markets it will use its foreign exchange firepower if need be to stop market sell-off triggered by coronavirus spread.

The central bank also announced the dollar-rupee swap of $2 billion to be conducted on Monday, which willy-nilly ruled out any further interest rate action before April 3 monetary policy review.

The level of forex reserves at $487.24 billion as on March 6, 2020 remains comfortable to meet any exigency, the RBI said in a note.

The central bank also asked state governments not to exhibit any panic reaction to the crisis in a private sector bank by transferring their deposits out to private lenders.

In a letter written to chief secretaries of all states, the central bank said moving deposits out of private sector banks could have implications for banking and financial sector stability.

The letter came after reports suggested that some state governments have advised government bodies and other entities under their jurisdiction to transfer their funds held with private sector banks to public sector lenders. This follows the crisis at Yes Bank where the RBI has superseded the bank's board and placed restrictions on withdrawals.

"We strongly believe that such a move can have banking and financial sector stability implications," the RBI wrote. "We feel that apprehension on the safety of deposits in private sector banks is highly misplaced and will not be in the interest of stability of the financial system in general and the banking system in particular."

It requested state governments to reconsider any decision they might have taken in this regard or are in the process of taking such a decision.

"The Reserve Bank has adequate powers to regulate and supervise the private sector banks and by using these powers, it has ensured that the depositors' money is entirely safe," the letter said.