RBI signs $400 million currency swap with Sri Lanka

The Reserve Bank of India (RBI) has signed an agreement for extending a $400-million currency swap facility to Sri Lanka to boost the foreign reserves and ensure financial stability of the country, which is badly hit by the COVID-19 pandemic. The currency swap arrangement will remain available till November 2022.

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Key-Points

The agreement between Sri Lanka and RBI has been signed under the South Asian Association for Regional Cooperation (SAARC) framework. The RBI also offers similar swap lines to central banks in the SAARC region within a total corpus of $2 billion. This facility originally came into operation in 2012.

India already has a $75 billion bilateral currency swap line with Japan, which has the second highest dollar reserves after China.

In the swap arrangement, a country provides dollars to a foreign central bank, which, at the same time, provides the equivalent funds in its currency to the former, based on the market exchange rate at the time of the transaction.

The parties agree to swap back these quantities of their two currencies at a specified date in the future, which could be the next day or even two years later, using the same exchange rate as in the first transaction. In Sri Lanka’s case, it’s more than two years.

These swap operations carry no exchange rate or other market risks, as transaction terms are set in advance. The absence of an exchange rate risk is the major benefit of such a facility.

This facility provides the country, which is getting the dollars, with the flexibility to use these reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity.