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RBI, Maldives Monetary Authority sign swap pact
Context
The Reserve Bank of India (RBI) has signed an agreement to extend up to a $200 million currency swap facility to Maldives Monetary Authority (MMA) under the SAARC Currency Swap Framework.
About
About the agreement:
- Objective: This agreement will enable the MMA to make drawals in multiple tranches up to a maximum of $200 million from the RBI.
- The facility is to provide swap support as a backstop line of funding for short-term foreign exchange liquidity requirements, it said.
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In 2020, the RBI signed a similar pact for extending up to $400-million currency swap facility to Sri Lanka. |
- Significance:
- The swap drawals can be made in US dollars, euros or Indian rupees.
- The framework provides certain concessions for swap drawals in the Indian rupee.
- Currency swaps are used to obtain foreign currency loans at a better interest rate than a company could obtain by borrowing directly in a foreign market or as a method of hedging transaction risk on foreign currency loans that it has already taken out.
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The SAARC Currency Swap Framework:
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How does this swap mechanism work between the parties?
- A currency swap is an agreement in which two parties exchange the principal amount of a loan and the interest in one currency for the principal and interest in another currency.
- At the inception of the swap, the equivalent principal amounts are exchanged at the spot rate.
- During the length of the swap, each party pays the interest on the swapped principal loan amount.
- At the end of the swap, the principal amounts are swapped back at either the prevailing spot rate or at a pre-agreed rate such as the rate of the original exchange of principals.
- Using the original rate would remove transaction risk on the swap.
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