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.
 
What
  1. 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.
  2. 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.
  3. 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.
  4. The framework is valid from November 14, 2019 to November 13, 2022.
  5. South Asian Association for Regional Cooperation (SAARC) member countries are -- Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
Flashback
  1. 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.
  2. At the inception of the swap, the equivalent principal amounts are exchanged at the spot rate.
  3. During the length of the swap each party pays the interest on the swapped principal loan amount.
  4. 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.
  5. 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.

[printfriendly]