Currency Swap Agreements
Economics
Why in the News?
The Reserve Bank of India (RBI) signed a currency swap agreement with the Maldives Monetary Authority under the SAARC framework for 2024-2027. The agreement finalized in New Delhi, will enable the Maldives to access $400 million through the US Dollar/Euro Swap Window and ₹30 billion under the Indian Rupee Swap Window.
PM Modi and President Muizzu, pledge to strengthen India-Maldives cooperation.
About Currency Swap Agreements
- It is an agreement in which two parties agree to exchange two currencies at a predetermined rate and then re-exchange those currencies at an agreed rate on a specified future date.
- These agreements are often used to hedge against currency exchange rate risks or secure more favorable financing in foreign currencies.
How do Currency Swap Agreements Work?
- Two parties exchange principal and interest payments on loans in different currencies.
- One party typically borrows in its domestic currency and lends in the foreign currency, while the other party does the opposite.
- The terms and exchange rates are established at the start of the contract.
Benefits
- Hedging: Protects against fluctuations in exchange rates, reducing currency risk exposure.
- Cost-effective Financing: Provides access to cheaper financing in foreign currencies compared to domestic options.
- Efficient Cash Flow Management: Enables better cash flow management for multinational corporations operating across various countries.
- Supports International Trade: Offers certainty in exchange rates for a specified period, facilitating international trade.
Users Currency Swap Agreements
- Multinational Corporations
- Financial Institutions
- Governments
Risks Associated
- Exchange Rate Risk
- Credit Risk
- Regulatory Risk
- Liquidity Risk
About Maldives
- Capital: Malé
- Currency: Maldivian Rufiyaa (MVR)
- Political System: Presidential republic
- Location: The Maldives is an island nation located in the Indian Ocean, southwest of Sri Lanka and India.
- Key Economic Activity: Tourism is the primary economic activity, followed by fishing and agriculture.
- International Organization Membership: Maldives is a member of the United Nations (UN), the South Asian Association for Regional Cooperation (SAARC), and the Commonwealth of Nations.
Map of Maldives