India-Sri Lanka Currency Swap Agreement
The Reserve Bank of India has signed an agreement for extending a $400-millin currency swap facility to Sri Lanka to boost the foreign reserves and ensure financial stability of the country, which is badly hit by the COVID-19 pandemic.
• A currency swap between two countries is an agreement to exchange currencies of the two countries or any hard currency, based on market exchange rate at the time of the transaction.
• The parties agree to swap (exchange) back these quantities of the two currencies at a specified date in the future at predetermined conditions like using the same exchange rate as in the first transaction.
• India already has a $75 billion bilateral currency swap line with Japan.
In the India-Sri Lanka swap agreement the drawals can be made in US Dollar, Euro or Indian Rupee.
This currency swap arrangement will remain available till November 2022.
The agreement took place under the South Asian Association for Regional Cooperation (SAARC) framework.
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.
PEPPER IT WITH
Currency Swap with Japan, Operation TWIST, Advance Pricing Agreement, SAARC
To further financial stability and economic cooperation within the SAARC region, the Reserve Bank of India last year revised Framework on Currency Swap Arrangement for SAARC countries 2019-2022 (valid from November 14, 2019 to November 13, 2022).
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, RBI will offer swap arrangement within the overall corpus of US $ 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 Currency Swap Facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.
Benefits of Swap agreements
The currency swaps agreements help countries to meet short term foreign exchange liquidity requirements.
It also ensures availability of adequate foreign exchange to avoid any Balance of Payments (BOP) crisis.
These swap operations carry no exchange rate or other market risks, as transaction terms are set in advance. The absence of an exchange rate risk is the major benefit of such a facility.
These positive developments illustrate active implementation of the leadership-level commitment to work together for addressing the challenges arising from the COVID-19 pandemic, and further the mutually beneficial India-Sri Lanka partnership, including in the economic domain.