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