What is SAARC Currency Swap Framework? | RBI Signed Agreement With Maldives

Relevance of SAARC Currency Swap Framework for UPSC

What is SAARC Currency Swap Framework?: A Currency Swap Framework is an agreement in which two parties exchange the principal amount of a loan and the interest in one currency for the principal and interest in another currency for the US Dollar. SAARC Currency Swap Framework is relevant for both UPSC Prelims and Mains.
SAARC Currency Swap Framework covers both Economy Section and IR section. It covers – GS 2: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests. It also covers – GS 3: Economy.

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Background of SAARC Currency Swap Framework

• The SAARC Currency Swap Framework came into operation on November 15, 2012.
• In January 2019, the Union Cabinet, chaired by the Prime Minister Shri Narendra Modi had given ex-post facto approval for amendment to the ‘Framework on Currency Swap Arrangement for SAARC Member Countries’ to incorporate a ‘Standby Swap’ amounting to USD 400 million operated within the overall size of the Facility of USD 2 billion and build in flexibility with respect to modalities of its operation.
• In 2020, the RBI had signed a similar pact for extending up to $400-million currency swap facility to Sri Lanka.

Why SAARC Currency Swap Framework in news?

• The Reserve Bank of India (RBI) has signed a SAARC Currency Swap Agreement with the Maldives Monetary Authority (MMA) under the SAARC Currency Swap Framework.
• Who are SAARC Members?: Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka are part of SAARC grouping.
• What is Bilateral Swap Arrangement?: Bilateral Swap Arrangement(BSA) is a two-way arrangement where both authorities can swap their local currencies in exchange for the US Dollar.

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What is Currency Swap Framework?

• A currency Swap Framework between countries is an agreement to exchange currencies with predetermined terms and conditions.
• At the inception of the swap, the equivalent principal amounts are exchanged at the spot rate.
• During the length of the swap each party pays the interest on the swapped principal loan amount.
• At the end of the swap, the principal amounts are swapped back at either the prevailing spot rate, or at a pre-agreed rate such as the rate of the original exchange of principals. Using the original rate would remove transaction risk on the swap.
• Currency swaps are used to obtain foreign currency loans at a better interest rate than a company could obtain by borrowing directly in a foreign market or as a method of hedging transaction risk on foreign currency loans which it has already taken out.

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What will be changed with India(RBI)-Maldives(MMA) Agreement?

• India(RBI)-Maldives(MMA) Agreement will provide Maldives swap support as a backstop line of funding for short term foreign exchange liquidity requirements.
• This is to provide swap support as a backstop line of funding for short term foreign exchange liquidity requirements.
• This agreement will enable the MMA to make drawals in multiple tranches up to a maximum of USD 200 million from the RBI.

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FAQs for SAARC Currency Swap Framework

Q. Who are SAARC Members?

Ans. Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka are part of SAARC grouping.

Q. When SAARC Currency Swap Framework came into operation?

Ans. The SAARC Currency Swap Framework came into operation on November 15, 2012.

Q. What is a currency Swap Framework?

Ans. A currency Swap Framework between countries is an agreement to exchange currencies with predetermined terms and conditions.

Q. What is Bilateral Swap Arrangement?

Ans. Bilateral Swap Arrangement(BSA) is a two-way arrangement where both authorities can swap their local currencies in exchange for the US Dollar.

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