q-what-do-you-understand-about-currency-swap-arrangements-discuss-rbis-currency-swap-arrangement-for-saarc-countries-and-its-significance

Q) What do you understand about currency swap arrangements? Discuss RBI’s currency swap arrangement for SAARC countries and its significance.

Why this Question?

Important part of GS paper- III.

Key demand of the Question 

Meaning of currency swap facility and features and significance of RBI’s currency swap arrangement for SAARC countries.

Directive 

Discuss- back up the answer by carefully selected evidence to make a case for and against an argument, or point out the advantages and disadvantages of the given context and finally arrive at a conclusion.

Introduction 

Start by defining currency swap arrangement.

Body 

In the first part, categorically highlight the features of RBI’s Currency Swap Arrangement. 

In the next part, highlight the significance of the arrangement.

Conclusion 

Conclude with a way forward.

Model Answer

A currency swap between the two countries is an agreement or contract to exchange currencies with predetermined terms and conditions. Central banks and Governments engage in currency swaps with foreign counterparts to meet short term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid Balance of Payments (BOP) crisis till longer arrangements can be made. 

RBI’s Currency Swap Arrangement for SAARC Countries 

With an objective to strengthen financial stability and economic cooperation and help the smaller countries in the region, 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 arrangements within the overall corpus of $2 billion. 
  1. RBI would enter into bilateral swap agreements with SAARC central banks, who want to avail swap facility. 
  1. The swap drawals can be made in US dollar, euro or Indian rupee. 
  1. The currency swap facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements. 

Significance of the Arrangement 

  • It improves the confidence in the Indian market. 
  • It enables the agreed amount of capital being available to India. 
  • It helps in bringing down the cost of capital for Indian entities while accessing the foreign capital market. 
  • It aids in bringing greater stability to foreign exchange and capital markets in India. 

Recently, Bangladesh cleared a USD 200 million currency swap facility for Sri Lanka, to help boost its economy. In such a situation, the presumption for RBI’s framework of currency swap facility that only India, as the regional group’s largest economy, could do this, no longer remains valid.