India-Sri Lanka: RBI extends 400 million USD of Currency Swap

On July 25, 2020, the Reserve Bank of India extended 400 million USD of currency swap with Sri Lanka. The currency swap agreement is to remain till November 2022.

Highlights

The currency swap facility was extended under the SAARC Currency Swap Framework. India is currently considering bilateral currency swap request of Sr Lanka for 1.1 billion USD. The arrangement is being made to address the economic slowdown.

What is Currency Swap?

A Currency Swap between two countries is an agreement to exchange currencies with predetermined agreement. The Governments engage in currency swap to solve short term foreign exchange liquidity requirements. Currency Swap is the exchange of interest (sometimes principal as well) in one currency for the same in the other.

Current SAARC currency swap agreements

The current SAARC currency swap agreement was signed in December 2019. The agreement is to run till 2022. The major features of the agreement are as follows

  • The Reserve Bank of India will offer swap arrangement with an overall corpus of 2 billion USD
  • The RBI agreed to enter into bilateral swap agreements with SAARC central banks that wishes to avail swap facility.
  • The withdrawals can be made in terms of USD, Indian Rupees or Euros
  • The currency swap arrangement shall be extended to all the SAARC countries provided they sign bilateral swap arrangements as well.

Why Currency Swap Arrangement?

The agreement is usually signed between two friendly countries that have increasing trade. Especially, the countries pay for import and export trade at pre-determined rates of exchange. In these cases, no third country currency is involved. This limits the concerns of exchange rate variations.

India

India has currency swap line with Japan and SAARC countries. India is currently negotiating similar arrangements with the US.

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