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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 The Bangladesh-Sri Lanka arrangement shows that is no longer valid.


Mussoorie Times

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