Currency Swap Framework

Why in News?

• The Reserve Bank of India (RBI) has recently 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.

Highlights

• The word swap means exchange. A currency swap between two countries is an agreement or contract to exchange currencies with predetermined terms and conditions.
• In the present context, the 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.
• 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.