RBI signs $400 mn currency swap with Sri Lanka

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News: The Reserve Bank of India(RBI) has signed a $400-million currency swap facility with Sri Lanka under the SAARC Currency Swap Framework 2019-22.

Facts:

  • Currency Swap: The term Swap means exchange.Under this, a country provides dollars to a foreign central bank which at the same time provides the equivalent funds in its currency to the former 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 could be the next day or even two years later using the same exchange rate as in the first transaction.
  • Benefits: These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
    • Hence,it provides benefit to the country which is getting dollars to use reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity.

Additional Facts:

  • SAARC Currency Swap Framework 2019-22: The SAARC currency swap framework came into operation in 2012.In 2019, the RBI revised the framework from 2019-2022.
  • Under the framework for 2019-22, RBI will offer swap arrangement within the overall corpus of USD 2 billion.The drawls can be made in US Dollar, Euro or Indian Rupee. 
  • The framework also provides certain concessions for swap drawals in Indian Rupee.
  • South Asian Association for Regional Cooperation(SAARC): It is a regional intergovernmental organization of states in South Asia.It was established in 1985.Members: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.