Declaimer: Copyright infringement not intended.

Context:

• The Reserve Bank of India (RBI), in collaboration with the Government of India, has announced a revised framework on currency swap arrangements for SAARC countries for the period 2024 to 2027.
• This framework aims to enhance financial stability and promote economic cooperation among SAARC member countries.

Key Features of the Framework

Introduction of INR Swap Window

• A dedicated Indian Rupee (INR) swap window has been established under the 2024-27 framework.
• This INR swap window includes various concessions aimed at providing robust swap support in Indian Rupee.

Total Corpus

• The total corpus allocated for the rupee support is ₹250 billion, highlighting India's commitment to supporting regional financial stability.

Continuation of US Dollar/Euro Swap Window

• Alongside the INR swap window, the RBI will maintain the US Dollar (USD) and Euro swap arrangements.
• The USD/Euro swap window retains an overall corpus of US$ 2 billion to facilitate liquidity support in these currencies.

SAARC Member Countries and Participation

• SAARC comprises eight member countries: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• The currency swap facility is available to all SAARC member countries upon signing bilateral swap agreements with India, as outlined in the RBI's official statement.

Purpose and Operational Scope

• The currency swap facility was initially launched on November 15, 2012, to provide immediate funding for short-term foreign exchange liquidity needs and to manage balance of payment crises within the SAARC region.
• It serves as a temporary measure until longer-term financial arrangements are established among member countries.

Strategic Implications

• The revised framework underscores India's commitment to regional economic integration and stability.
• It facilitates easier access to liquidity during financial stress periods, promoting smoother economic transactions and mitigating currency risks within the SAARC bloc.

Conclusion

• The RBI's revised currency swap framework for SAARC countries (2024-2027) reflects India's proactive approach towards fostering economic resilience and cooperation across South Asia.
• By providing substantial INR support and maintaining USD/Euro swap arrangements, India aims to bolster financial stability and deepen economic ties within the SAARC region, ensuring sustainable growth and resilience against external economic pressures.

READ ABOUT CURRENCY SWAP: https://www.iasgyan.in/daily-current-affairs/currency-swap

READ ABOUT DOLLAR RUPEE SWAP AUCTION: https://www.iasgyan.in/daily-current-affairs/dollarrupee-swap-auction

PRACTICE QUESTION Q. Explain the concept of currency swap agreements and discuss their role in managing foreign exchange risk. Illustrate your answer with relevant examples and discuss the potential challenges associated with currency swap agreements.

SOURCE: HINDU BUSINESSLINE