• The Reserve Bank of India (RBI) announced that it has decided to formulate a revised framework on currency swap arrangement for SAARC countries for the period 2024 to 2027 with the concurrence of the Government of India.

Key Points

• Under this framework, the Reserve Bank of India will enter into bilateral swap agreements with the central banks of the SAARC countries who wish to avail the swap facility.
• The SAARC Currency Swap Facility was launched on November 15, 2012, with the objective of providing a backstop line of financing for short-term foreign exchange liquidity requirements or balance of payment crises of the SAARC countries until a long-term arrangement is in place.
• Under the framework for 2024-27, a separate INR swap window has been introduced with various concessions for swap support in Indian rupees.
• The total corpus of rupee support is Rs 250 billion. RBI will continue to offer swap arrangements in US Dollar and Euro under a separate US Dollar/Euro Swap Window, with a total corpus of $2 billion.
• The currency swap facility will be available to all SAARC member countries, provided they sign bilateral swap agreements.

Currency Swap Agreement

• A currency swap agreement is a financial instrument between two parties that involves the exchange of principal and interest payments in different currencies
• It is like a loan in one currency as well as a deposit in another currency, wherein both parties agree to swap the principal and interest payments.
• It helps in managing foreign exchange risk, providing liquidity and facilitating international trade and investment.

For example

• Party A borrows currency X from Party B and simultaneously lends currency Y to Party B.
• The two parties agree to swap the principal and interest payments for a fixed period.
• At the end of the agreement, the parties swap the principal back to the original currencies.
• For example, an Indian company can enter into a currency swap agreement with a Japanese company to convert Indian Rupees into Japanese Yen, which helps the Indian company fund its operations in Japan.

Exam-oriented Important Facts

South Asian Association for Regional Cooperation (SAARC)

• SAARC was established on December 8, 1985.
• Its secretariat is located in Kathmandu, Nepal.
• The aim of this organization is to promote cooperation and dialogue among its member countries to address regional challenges and promote economic and social development.

It is a regional organization in South Asia consisting of eight member countries:

1. Afghanistan

2. Bangladesh

3. Bhutan

4. India

5. Maldives

6. Nepal

7. Pakistan

8. Sri Lanka

The objectives of SAARC include

• Promoting economic growth and development.
• Enhancing economic cooperation and trade.
• Improving the standard of living.
• Strengthening regional cooperation in various fields e.g., education, health, science, technology, and culture.
• Promoting peace, stability, and security in the region.