India, US in talks for dollar swap line

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News:India is working with the United States to secure a dollar (currency) swap line that would help in providing an additional comfort in an event of any abrupt outflow of funds.

Facts:

Dollar Swap arrangement:

  • Under this, the US Federal Reserve will provide dollars to a foreign central bank. 
  • At the same time,the foreign central bank provides the equivalent amount of funds in its currency to the Fed based on the market exchange rate at the time of the transaction.
  • The parties agree to swap back these quantities of their two currencies at a specified date in the future which is the next day or as far ahead as three months using the same exchange rate as in the first transaction.
  • These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.

Additional Facts:

Currency Swap arrangement:

  • The word swap means exchange.It is an arrangement to exchange currencies with predetermined terms and conditions. 
  • Governments engage in currency swaps with foreign counterparts to meet short term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid Balance of Payments (BOP) crisis till longer arrangements can be made.