SAARC Currency Swap Framework

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SAARC Currency Swap Framework

  • Recently, the Reserve Bank of India (RBI) has signed an agreement to extend a currency swap facility of up to US$ 200 million to the Maldives Monetary Authority (MMA) under the SAARC Currency Swap Framework.

Currency Exchange Framework:

  • Currency swap or currency exchange refers to an agreement or contract made between two countries for the exchange of currencies with predetermined terms and conditions.
  • In the present context, this facility provides swap facility as an alternative source of funding for short-term foreign exchange liquidity requirements.
  • In the year 2020, RBI signed a currency swap arrangement with Sri Lanka worth US$ 400 million.
  • Until a permanent arrangement is made, central banks and governments decide to swap currencies with foreign counterparts to ensure sufficient foreign exchange to meet short-term foreign exchange liquidity requirements or to avoid a balance of payments crisis. .
  • In these swap agreements, there is no exposure to exchange rate or other market related risks as the terms of the transaction are determined in advance.
  • Exchange rate risk, also known as currency risk, refers to the financial risk arising from fluctuations in the value of the base currency against a foreign currency.

Reserve Bank’s Framework for Swap Facilities for SAARC:

  • The SAARC Currency Swap Facility came into force on 15 November 2012.
  • The Reserve Bank of India offers a swap arrangement within the overall corpus of US$ 2 billion.
  • The swap arrangement can be entered into in US Dollars, Euros or Indian Rupees. The framework also provides for certain relaxations for swap exits in Indian Rupees.
  • This facility will be available to all SAARC member countries, provided they have signed bilateral swap agreements.

South Asian Association for Regional Cooperation

  • The South Asian Association for Regional Cooperation (SAARC) was established on December 8, 1985 in Dhaka.
  • Its member countries are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka.
  • Its secretariat is located in Kathmandu, the capital of Nepal.
  • Its objective is to accelerate economic growth, social progress, cultural development in the region and to provide opportunities to all individuals to live a life of dignity and to assess their potential.

Source – The Hindu

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