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RBI Signs Currency Swap Agreement with Maldives Monetary Authority

The Reserve Bank of India has signed a Currency Swap Agreement with the Maldives Monetary Authority (MMA) to enable MMA to make drawals in multiple tranches up to a maximum of $200 million from the RBI. This agreement has been signed under the SAARC Currency Swap Framework.

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Need Of This Move:

The agreement will provide swap support as a backstop line of funding for short-term foreign exchange liquidity requirements.

About Currency Swap Arrangement:

  • The word swap means exchange. A currency swap between two countries is an agreement or contract to exchange currencies with predetermined terms and conditions.
  • In the present context, the facility is to provide swap support as an alternative source of funding for short-term foreign exchange liquidity requirements.
  • Central banks and Governments engage in currency swaps with foreign counterparts to meet short-term foreign exchange liquidity requirements or to ensure adequate foreign currency to avoid the Balance of Payments (BOP) crisis till longer arrangements can be made.
  • These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
    • Exchange rate risk, also known as currency risk, is the financial risk arising from fluctuations in the value of a base currency against a foreign currency in which a company or individual has assets or obligations.

About RBI’s Framework for Swap Facilities for SAARC:

  • The SAARC currency swap facility came into operation on 15th November, 2012.
  • The RBI can offer a swap arrangement within the overall corpus of USD 2 billion.
  • The swap drawals can be made in US dollar, euro or Indian rupee. The framework provides certain concessions for swap drawals in Indian rupee.
  • The facility will be available to all SAARC member countries, subject to their signing the bilateral swap agreements.

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