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