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Currency Swap Arrangement
Context:
The Reserve Bank of India (RBI) has decided to put in place a revised Framework on Currency Swap Arrangement for SAARC countries
About the Revised Framework:
- Under this Framework, the Reserve Bank would enter into bilateral swap agreements with SAARC central banks, who want to avail of the swap facility.
- “Under the Framework for 2024-27, a separate INR Swap Window has been introduced with various concessions for swap support in Indian Rupee,”
- The total corpus of the Rupee support is ₹250 billion.
- The Currency Swap Facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.
- The SAARC Currency Swap Facility came into operation on November 15, 2012
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- Objective :To provide a backstop line of funding for short term foreign exchange liquidity requirements or balance of payment crises of the SAARC countries till longer term arrangements are made.
- The RBI will continue to offer swap arrangements in US$ and Euro under a separate US Dollar/ Euro Swap Window with an overall corpus of US$ 2 billion.
Currency Swap :
- Under this agreement, two contracting countries loan each other a specified amount in local currencies or any major currency.
- Thus, it eliminates the need for the currency of any other country like US Dollars.
- The parties agree to swap back this amount at a specified date on the same exchange rate as agreed initially.
- So, a bilateral currency swap is a kind of open-ended credit line from one country to another at a fixed exchange rate.
Benefits of Currency Swap facility:
- Carry no exchange rate or other market risks as the transaction terms are set in advance.
- Reduces the need of maintaining foreign exchange reserves for bilateral trade. Thus, it promotes bilateral trade.
- De-dollarisation of the world currency reserve and internationalisation of the Indian rupee.
- Back-up funding line for short-term foreign exchange liquidity needs or balance of payment crises in Saarc countries until long-term arrangements can be made.
- Boosting Investment: As the Investors may feel more confident knowing that there is a mechanism in place to manage currency risks.
