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.

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