SAARC Currency Swap Framework

Why in news?

• Recently, the Reserve Bank of India (RBI) has signed an agreement to extend up to a USD 200 million currency swap facility to Maldives Monetary Authority (MMA) under the SAARC Currency Swap Framework.

About Currency Swap Framework:

• A currency swap between two countries is an agreement or contract to exchange currencies with predetermined terms and conditions. This facility is to provide swap support as an alternative source of funding for short-term foreign exchange liquidity requirements.
• In 2020, the RBI signed a currency swap agreement for extending up to a USD 400 million to Sri Lanka.
• Central banks and Governments engage in currency swaps with foreign counterparts to meet short-term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid the Balance of Payments (BOP) crisis till longer arrangements can be made.
• These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
• Exchange rate risk, also known as currency risk, is the financial risk arising from fluctuations in the value of a base currency against a foreign currency in which a company or individual has assets or obligations.

SAARC Currency Swap Framework:

• The SAARC currency swap facility came into operation on 15th November, 2012.
• The RBI can offer a swap arrangement within the overall corpus of USD 2 billion.
• The swap 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.

PRACTICE 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