The Reserve Bank of India (RBI) has signed an agreement for extending a $400-million currency swap facility to Sri Lanka. This currency swap is used to boost the foreign reserves and ensure the financial stability of the country, which is badly hit by the COVID-19 pandemic. The currency swap arrangement will remain available till November 2022. Sri Lanka was set to enter into an agreement with the RBI for a currency swap worth $400 million under the South Asian Association for Regional Cooperation (SAARC) framework.
What is a Currency Swap?
In the swap arrangement, a country provides dollars to a foreign central bank, which, at the same time, provides the equivalent funds in its currency to the former, based on the market exchange rate at the time of the transaction. The parties agree to swap back these quantities of their two currencies at a specified date in the future, which could be the next day or even two years later, using the same exchange rate as in the first transaction.
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