Context: Reserve Bank of India (RBI) and the Central Bank of Sri Lanka (CBSL) had concluded the USD 400 million currency swap agreement in July last year under the SAARC currency swap framework.

• It was extended for 3 months on Central Bank of Sri Lanka (CBSL)’s request.
• The further extension requires Sri Lankan negotiations with the staff-level agreement for an International Monetary Fund (IMF) programme.

What is a Currency Swap Agreement?

• The Currency Swap Agreement means the contract for the exchange of Currencies at predetermined Terms and Conditions.
• It is like an open-ended Credit Line by one country to another
• The Interest rates are charged as per standard benchmarks like LIBOR, etc

Benefits of Currency Swap Agreement

• Absence of an exchange rate risk is the major benefit of such a facility.
• Swaps agreements between governments also have supplementary objectives like:

Promotion of bilateral trade

• Maintaining the value of foreign exchange reserves with the Central Bank
• Ensuring financial stability (protecting the health of the banking system)

Road Ahead

• The Currency Swap Agreement and its extension in the case of Sri Lanka is a reconfirmation of India’s Adherence to Gujral Doctrine while dealing with neighbours as well as rule-based currency regime.

About SAARC Currency Swap Facility

• Became operational in 2012
• Revised framework proposes that
• Overall corpus of USD 2 billion will be extended by RBI.
• Swap drawls can be made in US Dollar, Euro or Indian Rupee.
• If swap currency is in Indian Rupees, certain concessions may be extended.
• Any SAARC member can avail this facility subjected to their signing of bilateral Swap agreements
• Valid from 2019 to 2022.