Framework on Currency Swap revised for SAARC

The Reserve Bank of India (RBI) has signed a Currency Swap Agreement with the Maldives Monetary Authority (MMA) under the SAARC Currency Swap Framework.

• This is to provide swap support as a backstop line of funding for short term foreign exchange liquidity requirements.
• This agreement will enable the MMA to make drawals in multiple tranches up to a maximum of USD 200 million from the RBI.

Highlights of the SAARC Currency Swap Agreement

• The SAARC currency swap facility came into operation on 15^th November, 2012.
• The RBI can offer a swap arrangement within the overall corpus of USD 2 billion.
  • The swap drawals can be made in US dollar, euro or Indian rupee.
  • The framework provides certain concessions for swap drawals in Indian rupee.
• The facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.
• In 2020, the RBI signed a currency swap agreement for extending up to a USD 400 million to Sri Lanka.

What is Currency Swap?

• Swap is short for exchange. A contract or agreement to exchange currencies between two nations under predetermined terms and conditions is known as a currency swap.
• In the present context, the facility's role in the current situation is to offer swap support as a substitute source of funding for short-term foreign exchange liquidity needs.
• Central banks (or Governments) engage in currency swaps with foreign counterparts to meet short-term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid the Balance of Payments (BOP) crisis till longer arrangements can be made.
  • These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
• At the inception of the swap, the equivalent principal amounts are exchanged at the spot rate.
• At the end of the swap, the principal amounts are swapped back at either the prevailing spot rate, or at a pre-agreed rate such as the rate of the original exchange of principals. Using the original rate would remove transaction risk on the swap.