Print Friendly, PDF & Email

Currency swap arrangement

Topics Covered:

Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

 

Currency swap arrangement

What to study?

For Prelims and Mains: Meaning, significance and implications of Currency swap.

Context: With an objective to strengthen financial stability and economic cooperation, the Reserve Bank of India has revised the framework on currency swap arrangement for SAARC countries till 2022. 

As per the new framework:

  1. RBI will continue to offer swap arrangement within the overall corpus of $2 billion.
  2. RBI would enter into bilateral swap agreements with SAARC central banks, who want to avail swap facility.
  3. The drawals can be made in US dollar, euro or Indian rupee.
  4. The currency swap facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.

What is this Currency Swap Arrangement (CSA)?

This is an arrangement, between two friendly countries, which have regular, substantial or increasing trade, to basically involve in trading in their own local currencies, where both 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.

Significance of the agreement:

  1. The currency swap agreement is an important measure in improving the confidence in the Indian market and it would not only enable the agreed amount of capital being available to India, but it will also bring down the cost of capital for Indian entities while accessing the foreign capital market.
  2. The swap arrangement should aid in bringing greater stability to foreign exchange and capital markets in India. With this arrangement in place, prospects of India would further improve in tapping foreign capital for country’s developmental needs. This facility will enable the agreed amount of foreign capital being available to India for use as and when the need arises.

Sources: the Hindu.