Comprehensive Guide to Currency Swap Arrangements by RBI

What is a Currency Swap Arrangement?

A currency swap arrangement is a financial agreement between two countries to exchange their currencies. This arrangement enables the nations to settle trade and investment transactions directly, eliminating the need for converting their currencies through foreign exchange markets. Such arrangements foster smoother financial interactions between the participating countries.

Main Features of RBI’s Revised Framework for SAARC Countries

The Reserve Bank of India (RBI) has introduced several key features aimed at enhancing trade and financial stability among SAARC countries:

• Introduction of INR Swap Window: The RBI has launched a dedicated Indian Rupee (INR) swap window that offers various concessions to support liquidity.
• Rupee Support Corpus: A total corpus of ₹250 billion has been allocated to ensure adequate liquidity support in INR.
• Continued USD/Euro Swap Window: The RBI will maintain its swap arrangements in U.S. dollars and euros, with an overall corpus of $2 billion available for these transactions.

Significance of Currency Swap Arrangements

Currency swap arrangements play a vital role in maintaining economic stability and fostering trade among SAARC countries:

• Economic Stability: These arrangements provide critical liquidity support during financial crises, helping to stabilize the economies of participating nations.
• Facilitation of Trade: They promote trade and investment among SAARC countries by reducing dependence on hard currencies like the U.S. dollar and euro.
• Strengthening Regional Cooperation: The framework enhances regional economic cooperation and integration, ultimately benefiting all member countries.

Specific Benefits of the INR Swap Window

The introduction of the INR swap window offers several advantages:

• Concessions for Swap Support: It provides various concessions, making it easier for SAARC countries to access liquidity in Indian rupees.
• Reduction of Currency Risk: This arrangement aids in minimizing currency risk and reliance on fluctuating foreign exchange markets, thereby ensuring more stable financial transactions.

Overall Financial Commitment of the RBI

The RBI's comprehensive financial commitment to these swap arrangements includes ₹250 billion allocated for the INR swap window and an additional $2 billion for the U.S. dollar/euro swap window. This substantial commitment demonstrates the RBI's dedication to facilitating trade and enhancing financial stability within the region.

Frequently Asked Questions (FAQs)

Q1. What is a currency swap arrangement?
Answer: A currency swap arrangement is a financial agreement between two countries to exchange currencies, allowing them to settle trade without market conversions.

Q2. What are the main features of RBI's INR swap window?
Answer: The RBI's INR swap window features a ₹250 billion support corpus and offers concessions for liquidity access, enhancing trade among SAARC nations.

Q3. How do currency swap arrangements help in economic stability?
Answer: These arrangements provide liquidity support during financial crises, thereby stabilizing member countries' economies and promoting trade.

Q4. What are the benefits of the INR swap window for SAARC countries?
Answer: The INR swap window reduces currency risk and eases access to liquidity in Indian rupees, benefiting trade and investment among member states.

Q5. What is the overall financial commitment of the RBI for these arrangements?
Answer: The RBI has committed ₹250 billion for the INR swap window and $2 billion for the U.S. dollar/euro swap windows, ensuring robust support for SAARC countries.

UPSC Practice MCQs

Question 1: What is the primary purpose of a currency swap arrangement?
A) To exchange currencies for personal use
B) To settle trade and investment transactions without market conversions
C) To increase foreign exchange reserves
D) To limit currency fluctuations
Correct Answer: B

Question 2: How much is the corpus for the INR swap window established by RBI?
A) ₹100 billion
B) ₹250 billion
C) ₹500 billion
D) ₹1 trillion
Correct Answer: B

Question 3: Which currency does the RBI NOT include in its swap arrangements?
A) Indian Rupee
B) Euro
C) U.S. Dollar
D) Japanese Yen
Correct Answer: D

Question 4: What is a significant benefit of the currency swap arrangement?
A) Increased foreign investments
B) Reduction of dependency on hard currencies
C) Fixed exchange rates
D) High-interest rates
Correct Answer: B

Question 5: What is the total financial commitment of RBI for U.S. dollar/euro swaps?
A) $1 billion
B) $2 billion
C) $5 billion
D) $10 billion
Correct Answer: B