India extends duration of $400 mn currency swap facility to Sri Lanka

Tags: Economy/Finance

India has expanded a currency swap facility worth $400 million to Sri Lanka, which is facing an economic crisis.

• The government led by Sri Lankan President Gotabaya Rajapaksa on April 12 temporarily suspended repayment of various debts.

• After that this is the first time that the loan facility has been extended to Sri Lanka.

• Earlier, Sri Lanka had said that it would not be able to repay any international debt until an agreement is reached with the International Monetary Fund (IMF).

• The Reserve Bank of India (RBI) had signed a currency swap agreement with the Central Bank of Sri Lanka under the SAARC Currency Swap Framework 2019-22.

• Under the agreement, the Central Bank of Sri Lanka can withdraw a maximum of $ 400 million or its equivalent in US dollars, euros or Indian rupees.

• What is a Currency Swap?

• A currency swap is a transaction in which two parties exchange equal amounts with each other but in different currencies.

• Under this, the parties essentially lend money to each other and pay the amount on a specified date and exchange rate.

• Its purpose is to reduce the cost of borrowing in a foreign currency.

• The parties involved in currency swaps are usually financial institutions.

• SAARC currency swap facility

• The SAARC currency swap facility came into operation on November 15, 2012.

• It provides funding for short term foreign exchange liquidity requirements or short-term balance of payments stress. 

• This facility is available to all SAARC member countries, provided they sign bilateral swap agreements.

• Apart from India, the other South Asian Association for Regional Cooperation (SAARC) member countries are Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka.