TAG: GS 2: INTERNATIONAL RELATIONS
THE CONTEXT: The Reserve Bank of India (RBI), in collaboration with the Government of India, has introduced a revised Framework on Currency Swap Arrangement specifically for SAARC (South Asian Association for Regional Cooperation) countries.
EXPLANATION:
- This framework, applicable from 2024 to 2027, aims to provide financial stability and address short-term foreign exchange liquidity requirements or balance of payment crises within SAARC nations.
Historical Context and Objectives
- The SAARC Currency Swap Facility was initially launched on November 15, 2012.
- The primary objective was to offer a financial backstop for SAARC member countries facing short-term liquidity issues or balance of payment challenges.
- This facility served as an interim measure until more permanent solutions could be established.
Key Features of the 2024-2027 Framework
- INR Swap Window
- A significant addition to the revised framework is the introduction of a separate INR (Indian Rupee) Swap Window.
- This window includes various concessions aimed at supporting swap arrangements in Indian Rupees.
- The total corpus allocated for the INR swap support stands at Rs 250 billion.
- This new feature underscores India’s commitment to enhancing regional financial stability and promoting the use of the Indian Rupee within the region.
- US Dollar and Euro Swap Window
- In addition to the INR Swap Window, the RBI will continue to offer swap arrangements in US Dollars and Euros.
- This will be facilitated under a separate US Dollar/Euro Swap Window, with an overall corpus of US$ 2 billion.
- This provision ensures that SAARC countries have access to major global currencies, thereby enhancing their ability to manage foreign exchange liquidity more effectively.
- Availability and Bilateral Agreements
- The revised Currency Swap Facility is available to all SAARC member countries, provided they sign the necessary bilateral swap agreements with the RBI.
- This requirement ensures that the participating countries adhere to the terms and conditions set forth by the RBI, thereby promoting mutual cooperation and financial stability within the SAARC region.
Benefits and Strategic Importance
- The revised framework offers several strategic benefits:
- Enhanced Financial Stability: By providing a financial safety net, the framework helps SAARC countries manage short-term foreign exchange liquidity issues, thereby reducing the risk of balance of payment crises.
- Promotion of Regional Cooperation: The framework fosters greater economic cooperation among SAARC nations, reinforcing the collective financial resilience of the region.
- Encouragement of INR Usage: The introduction of the INR Swap Window promotes the use of the Indian Rupee within the region, potentially reducing dependence on other major currencies and fostering regional economic integration.
- Access to Major Currencies: The continued provision of US Dollar and Euro swap arrangements ensures that SAARC countries have access to globally accepted currencies, enhancing their ability to manage international trade and financial transactions.
Currency Swap:
- A currency swap involves the exchange of interest—and sometimes of principal—in one currency for the same in another currency.
- Companies doing business abroad often use currency swaps to get more favorable loan rates in the local currency than if they borrowed money from a local bank.
- Considered to be a foreign exchange transaction, currency swaps are not required by law to be shown on a company’s balance sheet.
- Interest rate variations for currency swaps include fixed rate to fixed rate, floating rate to floating rate, or fixed rate to floating rate.
SAARC (South Asian Association for Regional Cooperation)
- The South Asian Association for Regional Cooperation (SAARC) is the regional intergovernmental organization and geopolitical union of states in South Asia.
- Its member states are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
- SAARC comprises 3% of the world’s land area, 21% of the world’s population and 5.21% (US$4.47 trillion) of the global economy, as of 2021.
- SAARC was founded in Dhaka on 8 December 1985.
- Its secretariat is based in Kathmandu, Nepal. The organization promotes economic development and regional integration.
- It launched the South Asian Free Trade Area in 2006.
- SAARC maintains permanent diplomatic relations at the United Nations as an observer and has developed links with multilateral entities, including the European Union.
- However, due to the geopolitical conflict between India and Pakistan and the situation in Afghanistan, the organization has been suspended for a long time, and India currently cooperates with its eastern neighbors through BIMSTEC.