Currency Swap Facility
Currency Swap Facility
Why in news?
- Recently, Bangladesh cleared a USD 200 million currency swap facility for Sri Lanka, to help boost its economy.
What is this Currency Swap Arrangement (CSA)?
- An arrangement between two friendly countries to involve in trading in their own local currencies.
- As per the arrangements, both countries pay for import and export trade at the pre-determined rates of exchange, without bringing in third country currency like the US Dollar.
- In such arrangements no third country currency is involved, thereby eliminating the need to worry about exchange variations.
About Forex Swap
- In finance, a foreign exchange swap (forex swap, or FX swap in short) is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates and may use foreign exchange derivatives. Currency Swap Facility
- A forex swap allows sums of a certain currency to be used to fund charges designated in another currency without acquiring foreign exchange risk.
- It permits companies that have funds in different currencies to manage them efficiently.
Types Of Currency Swap Agreements
- Exchange cash for cash vs cash for securities;
- Exchange conditional vs unconditional swaps;
- Exchange reserve currencies on both sides;
- Exchange reserve currency for non-reserve currency; and
- Exchange non-reserve currencies on both sides.
RBI’s Framework for Swap Facilities for SAARC
- The SAARC currency swap facility came into operation on 15th November, 2012.
- The revised framework is valid from 14th November, 2019 to 13th November, 2022.
- 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. Currency Swap Facility
- The facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.
- The presumption was that only India, as the regional group’s largest economy, could do this. The Bangladesh-Sri Lanka arrangement shows that is no longer valid.
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