Currency Swap Agreement

A currency swap is an arrangement in which two countries, usually through their central banks, agree to exchange currencies for a specified period on pre-decided terms. The arrangement helps a country access foreign currency when it faces temporary liquidity pressure.

Why Do Countries Use Currency Swaps?

Foreign Exchange Support: A currency swap gives a country access to another currency when foreign exchange liquidity becomes tight.

Balance of Payments Support: It can provide temporary financial support during a balance of payments crisis or external payment pressure, giving the country time to arrange longer-term financing.

Financial Stability: Currency swaps act as a safety net during periods of financial stress and strengthen cooperation between participating countries.

Rupee Internationalisation: Swaps involving the Indian rupee can also encourage its use in international transactions.

SAARC Currency Swap Facility

SAARC Currency Swap Facility: India introduced the SAARC Currency Swap Facility in 2012 to provide short-term foreign exchange support to member countries facing temporary liquidity problems or balance of payments pressures.

Current Framework (2024–27): RBI’s latest framework is applicable from 19 June 2024 to 18 June 2027. It has two separate swap windows.

USD/Euro Window: RBI can provide swap support in US dollars or euros, with an overall corpus of USD 2 billion.

INR Swap Window: A separate Indian Rupee swap window has been introduced with a corpus of ₹250 billion. It provides concessional terms for rupee-based swap support.

Eligibility: SAARC member countries can access the facility after entering into bilateral swap agreements with the RBI.

India’s Bilateral Currency Swaps

India–Japan: India and Japan have a bilateral currency swap arrangement of up to USD 75 billion. It serves as a financial backstop during periods of external sector stress.

India–Maldives: In 2024, the RBI entered into a currency swap agreement with the Maldives Monetary Authority under the SAARC framework. The arrangement provides access to both the USD/Euro window and the INR window.

India–Sri Lanka: India has also used currency swap arrangements as part of its financial support and regional economic cooperation with Sri Lanka.

Currency Swap and Foreign Exchange Reserves

Currency Swap: Provides temporary access to foreign currency under an agreed arrangement.

Foreign Exchange Reserves: These are foreign assets already held by a country’s central bank and used to meet external payment requirements.

Thus, a currency swap is best understood as an additional financial safety net, rather than a replacement for foreign exchange reserves.

FAQs

Q1. What is a currency swap agreement?
A currency swap is an arrangement between two countries or their central banks to exchange currencies for a specified period on predetermined terms.

Q2. Why are currency swaps used?
They provide short-term foreign exchange liquidity during temporary shortages or balance of payments pressures.

Q3. When was the SAARC Currency Swap Facility introduced?
The facility was introduced in 2012 to provide a financial backstop to SAARC countries facing short-term foreign exchange or balance of payments difficulties.

Q4. What is the current SAARC Currency Swap Framework?
The current framework covers 19 June 2024 to 18 June 2027 and operates through separate USD/Euro and INR swap windows.

Q5. What is the corpus of the USD/Euro swap window?
The USD/Euro window has an overall corpus of USD 2 billion.

Q6. What is the corpus of the INR swap window?
The separate INR swap window has a corpus of ₹250 billion.

Q7. Who operates India’s SAARC currency swap facility?
The Reserve Bank of India (RBI) provides the swap facility to eligible SAARC countries through bilateral agreements.

Q8. What is the difference between a currency swap and foreign exchange reserves?
Foreign exchange reserves are assets already held by a central bank, while a currency swap provides temporary access to another currency under a pre-agreed arrangement.

Q9. Does a currency swap help during a Balance of Payments crisis?
Yes. It can provide temporary foreign exchange support, allowing a country time to arrange longer-term financing.

Q10. Why is the INR swap window important for India?
It provides regional liquidity support while also encouraging the greater use of the Indian rupee in cross-border financial transactions.