The Reserve Bank of India (RBI) plays a crucial role in facilitating the Currency Swap Facility among SAARC nations. A currency swap is an agreement where one central bank exchanges its currency with another, helping both banks manage financial requirements.
Imagine the RBI wants to assist Sri Lanka, which uses the Sri Lankan Rupee (LKR). Through a currency swap, the RBI exchanges Indian Rupees (INR) for LKR. For example, if the RBI provides ₹100 crore, Sri Lanka will offer an equivalent amount, approximately 18 billion LKR based on the current exchange rate.
The process includes:
This arrangement enables Sri Lanka to access INR for imports or to stabilize its currency during crises. Simultaneously, the RBI manages its reserves by holding LKR for potential trade and transactions.
The Reserve Bank of India utilizes currency swaps as a strategic tool for foreign exchange reserve management and to bolster economic stability.
Key features include:
Currency swaps serve as a vital backup for central banks, ensuring access to necessary currencies to support their economies.
Launched in November 2012, the original framework of the SAARC Currency Swap Facility aimed to provide short-term financial assistance to member countries facing balance of payments crises. The total capacity was US$ 2 billion, enabling countries to swap local currencies for US dollars.
Although the RBI does not reveal specific instances of usage, it is recognized that some SAARC nations, such as Sri Lanka, have accessed the facility, particularly in 2016.
The revised framework introduces significant changes:
These changes aim to promote the use of INR in international trade, enhancing regional financial cooperation and offering greater support to countries facing economic challenges.
The revised SAARC Currency Swap Facility underlines India's commitment to regional economic stability and its increasing significance in South Asian finance.
Q1. What is the purpose of the SAARC Currency Swap Facility?
Answer: The SAARC Currency Swap Facility provides financial assistance to member countries facing balance of payments crises, allowing them to exchange their local currencies for US dollars or Indian Rupees.
Q2. How does a currency swap benefit participating countries?
Answer: Currency swaps help countries manage their foreign exchange reserves, stabilize their currencies, and facilitate trade, reducing reliance on more dominant currencies like the US dollar.
Q3. What are the recent changes in the Currency Swap Facility?
Answer: The revised framework includes a dedicated INR swap window, promoting the use of Indian Rupees in regional trade and increasing the total size of the facility for INR swaps.
Q4. Which countries can participate in the SAARC Currency Swap Facility?
Answer: All SAARC member countries can participate in the currency swap facility, allowing them to exchange their currencies with the RBI for financial support.
Q5. How do currency swaps help during economic crises?
Answer: Currency swaps provide immediate liquidity support, helping countries stabilize their economies and manage financial risks during economic downturns or crises.
Question 1: What is the main objective of the SAARC Currency Swap Facility?
A) To promote trade between SAARC nations
B) To provide short-term financial assistance during crises
C) To strengthen military ties
D) To reduce taxes on imports
Correct Answer: B
Question 2: Which currency is primarily used in the revised SAARC Currency Swap Facility?
A) US Dollar
B) Japanese Yen
C) Indian Rupee
D) Euro
Correct Answer: C
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