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Framework on Currency Swap Arrangement for SAARC countries

Reserve Bank of India (RBI), with the concurrence of the Government of India (GoI), has put in place a revised framework on currency swap arrangement for SAARC countries.

What is Currency Swap?

'Currency swap' means an OTC foreign exchange derivative contract which commits two counterparties to exchange streams of interest payments and / or principal amounts in different currencies on specified dates over the duration of the swap at a pre-agreed exchange rate.

What is South Asian Association for Regional Cooperation (SAARC)?

The South Asian Association for Regional Cooperation (SAARC) was established with the signing of the SAARC Charter in Dhaka on December 08, 1985. The Secretariat of the Association was set up in Kathmandu on January 17, 1987.

The objectives of SAARC are to promote the welfare of the peoples of South Asia and to improve their quality of life; to accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity, etc.

SAARC comprises of 8 member countries – Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. 

What is the background of SAARC Currency Swap Facility?

The SAARC Currency Swap facility is being offered by RBI pursuant to the decision of SAARC Finance Ministers at the SAARC Ministerial Meeting on Global Financial Crisis, held on February 28, 2009 and was announced in the 24th SAARCFINANCE Governors’ Meeting in Pokhara, Nepal on May 16, 2012. 

SAARC Currency Swap Facility came into operation on November 15, 2012.

What is the objective of SAARC Currency Swap Facility?

The SAARC Currency Swap Facility is intended to provide a backstop line of funding for the SAARC member countries to meet any short term foreign exchange liquidity requirements or balance of payment crises, till longer term arrangements are made.

What are the features of SAARC Currency Swap Facility?

  • The facility is available to all SAARC member countries. 
  • For availing the facility, the central banks of requesting countries will need to enter into bilateral swap agreements with RBI, which need final approval from GoI. 
  • The facility has a corpus of US$ 2 billion. Under the facility, RBI offers Currency Swap Arrangement up to an overall amount of US$ 2 billion. 
  • The swap amount available to various member central banks has been arrived at broadly based on 2 months import cover subject to a floor of US$ 100 million and a maximum of US$ 400 million per country.
  • The swap is offered in US dollar, Euro or Indian Rupee against the domestic currency or domestic currency denominated government securities of the requesting country. 
  • The requesting member countries can make drawals of US dollar, Euro or Indian Rupee in multiple tranches. 
  • Each drawal is of 3 months tenor and can be rolled over twice. 
  • The first rollover will be at the normal rate of interest, while the second one attracts 50 bps interest more than the normal interest rate. 
  • The normal interest rate agreed upon is the LIBOR (for 3 months) (+) 200 basis points. The normal interest rate for INR swap is RBI Repo Rate (-) 200 basis points.

What are the recent updates in SAARC Currency Swap Facility?

The SAARC Currency Swap Facility had been extended by RBI (with the concurrence of GoI) from time to time. 

RBI, with the concurrence of GoI, has put in place a revised Framework on Currency Swap Arrangement for SAARC countries for the period 2024 to 2027. Under the Framework –

  • A separate INR Swap Window has been introduced with various concessions for swap support in Indian Rupee. 
  • The total corpus of the Rupee support is ₹250 billion. 
  • RBI will continue to offer swap arrangement in US dollar and Euro under a separate US Dollar / Euro Swap Window with an overall corpus of US$ 2 billion.


References

Reserve Bank of India. (2012, May 16). 'Reserve Bank of India Announces SAARC Swap Arrangement May 16, 2012, Pokhara, Nepal'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=26475

Reserve Bank of India. (2016, July 05). 'Master Direction - Risk Management and Inter-Bank Dealings (Updated as on May 03, 2024)'. Retrieved from https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485

Reserve Bank of India. (2016, February 23). 'RBI announces the extension of SAARC Swap Arrangement'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=36310

Reserve Bank of India. (2019, November 26). 'RBI announces the Framework on Currency Swap Arrangement for SAARC countries for the period 2019 to 2022'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48725

Reserve Bank of India. (2024, June 27). 'RBI announces the SAARC Currency Swap Framework for the period 2024 to 2027'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=58170

South Asian Association for Regional Cooperation (SAARC). (2020, July 12). 'About SAARC'. Retrieved from https://www.saarc-sec.org/index.php/about-saarc/about-saarc


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