Currency Swap agreement

IN NEWS:

• India and Sri Lanka agreed for a US $400 million currency swap agreement.
• The agreement signed by Reserve Bank of India extends the swap facility for Sri Lanka till November 2022.

About Currency Swap:

• A currency swap is a transaction in which two parties exchange principal and interest in different currencies.
• Companies doing business abroad often use currency swaps to get more favorable loan rates in the local currency than if they borrowed money from a local bank.
• For example, if Sri Lanka borrows Rs 100 from India and promises to repay Rs 100 in Indian currency but interest in dollars or vice versa, both parties benefit by hedging against interest rates.
• It reduces the risk of exchange rate changes and also reduces the interest rate risk.
• India had recently signed a Currency Swap agreement with Japan.

PRELIMS QUESTION

Consider the following statements regarding Currency Swaps:

1.It can only be used by Governments and not Companies.
2.It tends to reduce interest rate risks for participating countries.

Which among the above statements is/are correct?
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2

Answer to prelims question