Framework on currency swap revised for SAARC
The Reserve Bank said it has put in place a revised framework on currency swap arrangement for SAARC countries for 2019-2022. The SAARC currency swap facility came into operation on November 15, 2012 with an intention to provide a backstop line of funding for short-term foreign exchange liquidity requirements or balance of payment crises till longer-term arrangements are made.
- Based on the terms and conditions of the framework, the RBI would enter into bilateral swap agreements with SAARC central banks, who want to avail swap facility.
- Under the framework for 2019-22, the RBI will continue to offer a swap arrangement within the overall corpus of USD 2 billion. The 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.
- The framework is valid from November 14, 2019 to November 13, 2022.
- South Asian Association for Regional Cooperation (SAARC) member countries are -- Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
- A currency swap is an agreement in which two parties exchange the principal amount of a loan and the interest in one currency for the principal and interest in another currency.
- At the inception of the swap, the equivalent principal amounts are exchanged at the spot rate.
- During the length of the swap each party pays the interest on the swapped principal loan amount.
- 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.
- Currency swaps are used to obtain foreign currency loans at a better interest rate than a company could obtain by borrowing directly in a foreign market or as a method of hedging transaction risk on foreign currency loans which it has already taken out.