Currency swap facility
What are currency swap arrangements?
- In the swap arrangement, generally 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.
Why in News?
- The Central Bank of Sri Lanka (CBSL) settled a $ 400 million currency swap facility from the Reserve Bank (RBI) of India, meeting the terms that the two countries had agreed upon.
- The CBSL obtained the swap facility on July 31, 2020, for an initial period of three months, to cope with the severe economic impact of the pandemic. Subsequently, the RBI provided a three-month rollover at CBSL’s request, until February 1, 2021.
- The RBI also offers similar swap lines to central banks in the SAARC region within a total corpus of $2 billion.
- This facility originally came into operation on November 15, 2012 to provide a backstop line of funding for short-term foreign exchange liquidity requirements or balance of payment crises until longer term arrangements were made.
- Under the facility, RBI offers swaps of varying sizes in US Dollars, Euro or Indian Rupee to each SAARC member country depending on their two months import requirement.
- India also has a $75 billion bilateral currency swap line with Japan, which has the second highest dollar reserves after China.
Advantages of such arrangements
- These swap operations usually carry no exchange rate risk, as transaction terms are set in advance. The absence of an exchange rate risk is one of the major benefits of such a facility.
- This facility provides the country, which is getting the dollars, with the flexibility to use these reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity.
View all comments