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What is this Currency Swap Arrangement (CSA)?

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

What is this Currency Swap Arrangement (CSA)?

Context:

The Reserve Bank of India has agreed to a $400 million currency swap facility for Sri Lanka till November 2022.

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.

Significance of the agreement:

  • Improves the confidence in the Indian market.
  • Enables the agreed amount of capital being available to India.
  • Bring down the cost of capital for Indian entities while accessing the foreign capital market.
  • Aids in bringing greater stability to foreign exchange and capital markets in India.

Sources: the Hindu.