Monday, July 27, 2020

RBI extends $400 million currency swap facility to Sri Lanka

The Reserve Bank of India has agreed to a USD 400 million currency swap facility for Sri Lanka till November 2022 to boost the foreign reserves and ensure the financial stability of the country.
The  virtual meeting was attended by officials from the Ministry of Finance,Ministry of Foreign Affairs and the EXIM Bank with representatives of the Sri Lankan government.Currency swap will be under  the South Asian Association for Regional Cooperation (SAARC) framework.

What is a Currency Swap?
A currency swap is a transaction in which two parties exchange an equivalent amount of money with each other but in different currencies. The parties are essentially loaning each other money and will repay the amounts at a specified date and exchange rate. The purpose could be to hedge exposure to exchange-rate risk, to speculate on the direction of a currency, or to reduce the cost of borrowing in a foreign currency.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 Balance of Payments (BOP) crisis till longer arrangements can be made.

How a Currency Swap Works
In a currency swap, or FX swap, the counter-parties exchange given amounts in the two currencies. For example, one party might receive 100 million Euro , while the other receives $117 million. This implies a Euro/USD exchange rate of 1.17. At the end of the agreement, they will swap again at either the original exchange rate or another pre-agreed rate, closing out the deal.

The decision comes five months after Sri Lankan Prime Minister Mahinda Rajapaksa had visited New Delhi and a recent bilateral discussion on rescheduling Colombo’s outstanding debt repayment to India.
Sri Lanka owes USD 960 million to India.

Government and industry representatives from both countries also participated in a webinar on ‘Deepening Economic Collaboration between India and Sri Lanka’, organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) in association with other institutes.
Sri Lanka highlighted that non-tariff barriers in receiving countries create difficulties in market access.

A nontariff barrier is a way to restrict trade by using barriers other than a tariff. These include quotas, embargoes, sanctions, and levies.

To resolve that, it urged FICCI to collaborate with the Sri Lankan Mission in New Delhi to help boost the export of its spices and concentrates to the Indian market.

Ref:-The Hindu ,Investopedia

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